Oral Answers to Questions

CULTURE, MEDIA AND SPORT

The Secretary of State was asked—

Digital Switchover

Linda Gilroy: What recent discussions he has had with Digital UK on digital switchover in the south-west.

Andy Burnham: I met the chair and the chief executive of Digital UK at a reception of the all-party group on digital TV switchover and I will meet Digital UK regularly to discuss all aspects of digital switchover.

Linda Gilroy: I was pleased to note that Eaga has been appointed to help deliver assistance to those over 75, disabled people and those who are otherwise vulnerable. What plans has my right hon. Friend to help those who fall outside the help scheme?

Andy Burnham: My hon. Friend is right that Eaga has been appointed to run the digital switchover help scheme, which will be available to people aged over 75, those with a severe disability or those who are registered blind or partially sighted. The Eaga partnership will be well known to hon. Members through its work on the Warm Front scheme. Experience from Whitehaven shows that the help people received was rated good or very good, so there is some encouragement. For people outside the scheme, Digital UK has a helpline and website to give advice to everybody who has any questions as we get closer to switchover, which is about a year away in my hon. Friend's region.

Hywel Williams: Is the Secretary of State aware that, due to the arrangements for digital switchover, many thousands of my constituents will be unable to access digital radio perhaps until 2015, when the Irish turn off their analogue signal? Has he discussed the matter with the Irish? If not, will he do so and report to the House?

Andy Burnham: Wales is set for digital switchover in the third quarter of next year. I must be honest and say that I was not aware of the issue that the hon. Gentleman raised. I will be glad to discuss it with him further and ascertain whether we can hold discussions with our Irish counterparts to tackle the matters that he brings to my attention.

Mark Harper: The Secretary of State will know from the experience in Whitehaven, which he mentioned, that only 33 per cent. of those eligible contacted the help scheme. What steps will he take to ensure that, in other areas of the country, older people, for whom television is a necessity not a luxury, can contact the relevant scheme and get the help that they require?

Andy Burnham: Of some 8,600 households who were eligible, approximately 6,400 responses were received, which suggests a good take-up. I accept the hon. Gentleman's challenge that we need to work hard to ensure that people know about the help that is available. As we get closer to some of the switchover dates, people's questions—and possibly anxieties—will increase, so there is a challenge for Ministers to ensure that people are informed. However, there is also a challenge for local Members of Parliament to ensure that we give timely answers to constituents' questions. I am sure that, if we work in partnership on those matters, we can ensure a smooth switchover, which is in all our interests.

Creative Industries

Nadine Dorries: What assessment he has made of the contribution of the creative industries to the economy.

Margaret Hodge: Estimates published in October 2007 indicate that the creative industries accounted for at least 7.3 per cent. of gross value added in 2005, equivalent to £60.8 billion.

Nadine Dorries: A few weeks ago, the Government announced that they would launch a creative industries strategy. Where exactly is the financial boost to the creative economy that we all expected? After two years, does not the Minister think that the creative industries expect a little more than rehashed ideas and old announcements?

Margaret Hodge: I am sorry that the hon. Lady feels so negative about the strategy that we published, which has been warmly welcomed by most of the people in the sectors that we represent. The strategy is not a one-off attempt to respond to the issues that face the creative industry, but part of a continuing dialogue. Global competition and the fast-changing information technology environment mean that we must continuously revisit the strategy. The 26 practical and pragmatic recommendations in the document are all relevant to the industries and are not old, as she suggests.

John Whittingdale: Does the Minister accept that the success of the creative industries depends heavily on their continuing to be able to benefit from copyright? Will she therefore give the Government's support to Commissioner McCreevy's proposal that the term of copyright protection for performers should be extended, as was unanimously recommended by the Select Committee on Culture, Media and Sport?

Margaret Hodge: Copyright is a key issue across many of the sectors in what we have defined as the creative industries. There are two strategies. One is to do all that we can to protect existing copyright, but equally, all the industries have to think about new business models, which will enable them to prosper in a fast-changing environment, with convergence and all the new methods of communications. That said, we are looking with interest at the proposition that the European Commission has put forward. The hon. Gentleman will know that we have so far been guided by what Gowers said in his review, based on evidence. However, we treat such matters with an open mind and look forward to debates in Europe and elsewhere, as we reconsider the evidence that is around.

Nigel Evans: The creative industries are doing well for Britain, both economically and culturally, and one that does really well for us is our orchestras. The Minister is not going to believe this but she was apparently quoted as attacking one of the greatest British institutions where those orchestras have an opportunity to shine, which is the Proms. I am sure that she is keen and eager to get to the Dispatch Box to put the record straight and back the Proms.

Margaret Hodge: I congratulate the hon. Gentleman on his creativity. I do not expect that he has read what I said in what was a complex argument about the role of our cultural institutions in building British identity. It was not an attack on the Proms, but the way it was portrayed, being trivialised and sensationalised by the media, undermined the debate. I should like to quote, if I may, from what I said:
	"But all too often our sectors aren't at their best when embodying common belongings themselves. The audiences for many of our greatest cultural events—I'm thinking in particular of the Proms, but it is true of many others—is still a long way from demonstrating that people from different backgrounds feel at ease in being part of this. I know that this isn't about making every audience"— [Interruption.]
	If hon. Members listen, I will explain.
	"I know that this isn't about making every audience completely representative, but if we claim great things for our sectors in terms of their power to bring people together, then we have a right to expect that they will do whatever they can wherever they can. I know that many organisations have made great strides"— ][Interruption.]

Mr. Speaker: Order. I think that the rest can go in the Library.

Mark Field: The Minister understands the importance of the creative industries and I am glad that she has given them a thumbs up. One important aspect of the creative industries is the teaching of media studies, which we debated in the House when she was Minister for Lifelong Learning and Higher Education. Will she ensure that much more rigorous media studies degrees are offered in our universities by doing her little bit to bring together experts from the creative industries to ensure that the curricula are much more robust?

Margaret Hodge: The hon. Gentleman raises an important point. He will know that people who undertake media studies are more likely to get a job than those who undertake many other disciplines studied at university. Nevertheless, it is hugely important to ensure that the content of what is studied meets the needs of people in the industry. One of the propositions in our strategy is that Brighton university should undertake a review to see whether we can build a closer relationship between the contents of the curricula in media studies courses and the needs of employers.

Cultural Olympiad

Adrian Sanders: If he will make a statement on the Cultural Olympiad.

Andy Burnham: The Cultural Olympiad is a four-year nationwide programme of cultural and artistic events inspired by the London 2012 Olympic and Paralympic games, including major national flagship events and a UK-wide festival of local events. The London Organising Committee of the Olympic Games and Paralympic Games will announce further details tomorrow about how local groups can get involved in the Cultural Olympiad.

Adrian Sanders: That is a great pity, because I was hoping to get the answer today. One of the problems for local authorities and local communities that are keen to engage is getting the detail. Does the Secretary of State agree that we are talking about a tailor-made enterprise for a part of the visitor economy that wants to put on events to attract more people? If local groups can engage with this festival of events around the nation, that has to be to their benefit.

Andy Burnham: The short answer is: they can. When the details are announced tomorrow, I would expect the hon. Gentleman to be encouraging his local authority to get involved quite quickly and ensure that it can play a full part. I am sure that he will have been as encouraged as I was to see the Torbay leisure centre and Torbay Olympic gymnastics club listed in the guide of facilities last week, which is more good news for him. Seriously, however, all communities can play a full part and can have a piece of the Olympic games, but it is important that people go out there and create that for themselves, rather than expecting things to fall into their laps.

Jeff Ennis: Does the Secretary of State agree that the British Federation of Brass Bands, which is based in Barnsley—the home of good football—will play a vital role in making a success of the Cultural Olympiad?

Andy Burnham: It absolutely will, and may I say a brief word about Barnsley football club, which demonstrated the true grit and spirit of the FA cup to the whole nation on Saturday evening? I was about to say that we were all cheering the team on, but I do not want to rile any Chelsea supporters. It was a pleasure to watch them triumph.
	On brass bands, I am absolutely confident that the rich heritage that my hon. Friend describes—celebrated in the film "Brassed Off"—will play a very important part in our Olympic celebrations.

Patrick Cormack: Will the Secretary of State, without quoting from a speech that, for clarity, would do justice to the Archbishop of Canterbury, unequivocally assure the House that, when we come to the Cultural Olympiad in London, the Proms will have a central part?

Andy Burnham: Of course, I can assure the hon. Gentleman that the Proms will have a role to play, as will all cultural organisations. He will be encouraged, as I am, that we have long said that we want to make an international Shakespeare festival part of our Olympic celebrations. This is a time when all the best bits of our national heritage can be available for the whole world to see, and I absolutely include the Proms in that.

Schools (Culture)

Rosie Cooper: What contribution the find your talent scheme will make to ensuring that children receive five hours of culture each week.

Andy Burnham: The find your talent programme of 10 pilots will trial ways of offering children and young people a range of high quality cultural experiences for five hours a week, in and out of school. We are seeking applications from partnerships across the country. The pilots will give us the information that we need to make decisions about rolling out the offer nationally.

Rosie Cooper: Will my right hon. Friend give the time scale for the pilots and say a little more about them and whether areas such as West Lancashire will be eligible for such schemes?

Andy Burnham: Local partnerships have until 7 April to submit their bids, but we have already received more than 50 expressions of interest in the find your talent programme, which is a tremendous endorsement of the scheme's principles. It is important that in setting up the pilots we ensure that different parts of the country with different characteristics are chosen, so that we can consider how best to make arts activities and cultural activities available to all children in that area. I very much hope that my hon. Friend will work with her local organisations to make such a proposal.

Jeremy Hunt: I was tempted to ask the Secretary of State whether he thinks that the Proms could count towards to the five hours of culture, but I should like to ask him about a more serious point. Does he think that culture is something that can be quantified and enforced through targets or is there a risk that such a scheme will undermine the essence of culture, which is surely about quality, not about curriculum box ticking?

Andy Burnham: What is important is that this is not about five hours of curriculum time, but about young people having the chance to take part in a range of activities, both within the school day and beyond it. It is absolutely right that we should set the highest possible aspirations in that regard. I was at school in the 1980s, and I remember lots of after-school activity simply drying up, not to be reinstated at that time.

Jeremy Hunt: It was a Labour council.

Andy Burnham: It was not Labour councils but a Conservative Government who were responsible at that time.
	We should not limit our ambitions about the possibilities that we can put before young people. The worst thing that we could do is be narrow-minded or too downbeat about what we can achieve. Let us aim high and see whether we can give young people the full range of possibilities.

Brian Jenkins: I spent last evening in the Birmingham symphony hall, listening to Staffordshire Sings, where hundreds of young people—180 of them from the Tamworth constituency alone—presented a varied orchestral and choral programme. It was a marvellous event for those young people. Will he take the opportunity to congratulate Staffordshire on what it is doing and see how we can tie that into the find your talent scheme and roll it out across the country?

Andy Burnham: I will certainly take up my hon. Friend's invitation to look further at what Staffordshire is doing. What is important about initiatives such as that mentioned by my hon. Friend is that while some young people who take part will develop an interest and passion for singing that lasts throughout their lives, others, simply by participating, will develop greater self-confidence and better communication skills and feel that they are capable of performing in front of an audience. It does not matter whether people go on to develop a particular talent, because taking part in itself gives young people good life skills that stand them in good stead for the rest of their lives.

Listed Buildings

Desmond Swayne: What account is taken of recommendations by English Heritage when decisions are taken to list buildings.

Margaret Hodge: The Secretary of State has a statutory duty to consult English Heritage on listing decisions. Full account is taken of English Heritage's advice and recommendations, together with any other relevant representations that may be made.

Desmond Swayne: I understand that English Heritage made a very strong recommendation that Ibsley control tower should be listed. Given that the Minister is accountable to Parliament, will she give us a detailed explanation of why the Secretary of State chose to overrule that recommendation?

Margaret Hodge: After careful consideration of all the evidence, as the responsible Minister I decided that the building did not have sufficient architectural or historical interest to merit listing.

Bob Russell: Is the Minister aware that there is a serious problem in getting buildings listed as a result of English Heritage being understaffed? Will she look into that and, for starters, see how English Heritage can go into Britain's oldest recorded town, where many buildings are historic, but threatened with demolition?

Margaret Hodge: After a long time in which English Heritage had a flat cash settlement from the Government, we have been able in the latest comprehensive spending review settlement to ensure that it has additional resources over a three-year period. The House will shortly be considering the draft legislation resulting from the heritage protection review and I hope that, in that context, we can have an interesting discussion about the varying roles of English Heritage, the Department and other stakeholders, and the proper processes and funding required to carry them out.

Stewart Jackson: Flag Fen, to the east of Peterborough, is one of the finest bronze age sites in Europe, having been discovered literally by accident in 1982. It is presently in receipt of only English Heritage funding—no other Government funding—to the extent that its excavation and exhibition work is under threat. Will the Minister give an undertaking to look further into the level of funding for Flag Fen so that we can preserve this unique site for future generations?

Margaret Hodge: I do not know the details of the particular issues surrounding Flag Fen in the hon. Gentleman's constituency, so I would be extremely grateful if he would write to me with them so that I can consider the matter. English Heritage is one of the organisations with resources available to it to try to ensure that we protect and look after our valuable and wonderful heritage that is such an intrinsic part of Britain today.

School Sport

Ben Chapman: What steps his Department is taking to encourage participation in sport by girls of school age.

Gerry Sutcliffe: Through the joint Department for Culture, Media and Sport and Department for Children, Schools and Families physical exercise and sport strategy for young people, the Government are investing an additional £100 million to offer five hours of high quality PE and sport to all pupils aged five to 16 and three hours for those aged 16 to 19. That will bring our total investment to at least £755 million over the next three years and will enable the provision of further sporting opportunities that recognise and respond to girls' needs and abilities.

Ben Chapman: I welcome the investment in PE and sport during school hours, but does the Minister agree that we also need to provide resources for out of school hours activities? Port Sunlight rugby club in my constituency has used a £10,000 grant from Awards for All to develop a sport against crime initiative, which encourages young people off the streets and into sport, particularly into playing tag rugby, which being a non-contact sport can be played by both sexes. I commend that programme to the Minister and invite him to visit Wirral, South to see for himself the work that the Port Sunlight rugby club is doing.

Gerry Sutcliffe: I am always delighted to visit my hon. Friend's constituency and look forward to doing so, particularly to watch the tag rugby. It is important that rugby is played by girls, and I commend the Rugby Football Union's work on that. I was not being complacent earlier. We need to encourage more women and girls into sport. It is necessary to ensure that they can participate and that we end the appalling drop-out rates of girls and women in sport. I am minded to support the idea of Sue Tibballs, the chief executive of the Women's Sport and Fitness Foundation, to look at setting up a taskforce to see what we can do to widen the participation of women in sport.

Nicholas Winterton: The hon. Member for Wirral, South (Ben Chapman) asked an excellent question. Is it not important that the Government and local government give every encouragement to private sporting clubs that encourage young girls to participate in physical sport, such as the Macclesfield rugby union football club, which encourages young girls to take part in touch rugby, which is ideal for young women? Is it not important, too, that we do not allow any school playing field to be sold, because even the playing fields of those schools that are closed could be merged with those of a school next door, so that sport both during school hours and after school hours can be encouraged for boys and girls?

Gerry Sutcliffe: I congratulate the hon. Gentleman on his involvement in trying to ensure that more people become involved in sports, and, in particular, I congratulate Macclesfield on its work. We will address the issue of playing fields shortly, but we have put many safeguards in place to protect them. However, the issue is not just about playing fields; it is about sports provision. Like me, he too may have, over the course of many years, spent cold days on playing fields when it might have been better to play indoors, because more people would have participated. Playing fields are important, but they are not the only issue.

Hugh Robertson: One of the most popular sports with girls of school age is, of course, swimming. The Minister will be aware of the controversy over the closure of local authority baths, which are often being replaced by smaller private pools that are less accessible to the general public. The Sport England active places website claims that there are 171 such pools. Over the weekend it was alleged that 51 of them are in independent schools and six are on military bases, so they are hardly accessible to girls of school age. Why did that occur and has the Minister any evidence that it is happening in other sports, and therefore that the entire survey is flawed?

Gerry Sutcliffe: The hon. Gentleman has tabled a number of parliamentary questions that will be answered shortly, giving the detail of the figures that he requests on the breakdown of pools, both public and private. I am sure that if he wants to pursue the matter further, he will do so following that answer. In general terms, however, swimming is vital to us. It is one of the biggest participation sports in which girls and everybody else can get involved. We want to see investment in swimming. I am a bit put out by the campaign run by  The Daily Telegraph, which I think is inaccurate, and I will be happy to meet  The Daily Telegraph to talk about it.

Lindsay Hoyle: Of course everybody wants to see more girls playing sport, but we have to ensure that they have the ability to go to sporting grounds. Can we also ensure that we encourage them to play more than just football—and besides rugby union, there is a thing called rugby league, which is the great sport of the north—so that more girls play cricket following the success of the England women's cricket team, unlike the men's team?

Gerry Sutcliffe: Again, I congratulate the England women's cricket team on its excellent work and on the agreement reached between it and the federation on being paid appropriately. Perhaps football could learn from that lesson. My hon. Friend is right. We need to widen the sports in which girls participate beyond traditional sports to dance and other activities, while ensuring that they have access to physical recreation.

Gambling Act

Andrew Robathan: What assessment he has made of the likely effects on urban regeneration of the establishment of new casinos under the Gambling Act 2005.

Gerry Sutcliffe: The independent Casino Advisory Panel was asked to choose a range of areas in need of economic development and regeneration. An assessment of the economic and social impact of the 16 large and small casinos will be carried out three years after the first of the new casinos has begun trading. We expect that the assessment will be completed by 2014.

Andrew Robathan: I should declare an interest in that I gamble and have lost money on many different bets in several different countries, and very occasionally I have won a little bit as well.
	Notwithstanding that answer, most people in Britain remain to be convinced of any benefit that building a casino in a disadvantaged area would bring to regeneration. Will the Minister tell me what on earth a Labour Government are doing encouraging gambling, unless it is because of lobbying by companies that make their money out of other people, who may ill be able to afford it, losing money?

Gerry Sutcliffe: I wonder whether one of those bets that the hon. Gentleman placed was on the last Tory party leadership.

Andrew Robathan: It was, actually. The Minister is quite right.

Gerry Sutcliffe: Did the hon. Gentleman win or lose?

Andrew Robathan: I won.

Gerry Sutcliffe: It should be stressed that the casino policy was pursued at the request of local government. The Budd report on gambling was published in 2000, and it was felt that existing legislation affecting casinos should be updated. The policy is well travelled in the House, and I think that it enjoys the support of all parties in the House.

Julie Kirkbride: The Minister will be only too aware of the crisis affecting our seaside resorts and their urgent need for redevelopment funds. Although he was not in his present post at the time of the Gambling Act, can he explain why his party was wrong-headed enough not to follow the example of, for instance, France, which deliberately gave casino licences to its seaside and other resorts in order to improve their attraction to visitors?

Gerry Sutcliffe: I am sure that the hon. Lady will welcome the £45 million that is being invested in seaside towns as we try to find a way of regenerating our coastal resorts. As I have said, the gambling policy relating to casinos is well travelled. We asked the independent Casino Advisory Panel to examine the options available to us, and it came up with the idea of 16 casinos as well as a large regional casino. We are not proceeding with the large regional casino, but we are going ahead with the other 16.

David Taylor: Although there is extensive evidence of the potential economic and social damage caused by regional casinos and no such evidence relating to their poorer cousin the bingo hall, some bingo halls are teetering on the brink of closure, not least because of double taxation. Does the Minister share my hope that the Budget statement will contain an announcement that bingo will be put on the same basis as other similar activities, so that bingo halls can survive and continue to provide the considerable social benefits that they provide in many towns throughout the nation?

Gerry Sutcliffe: The plight of bingo halls is an important issue in all our constituencies, but, as my hon. Friend knows, taxation is a matter for the Chancellor and the Treasury. We look forward to hearing what is said in Wednesday's Budget statement. As my hon. Friend will also know, the DCMS and other Departments have been working with the Bingo Association to establish what else can be done to support the bingo community.

Tobias Ellwood: As my hon. Friend the Member for Blaby (Mr. Robathan) said in his declaration of an interest, our perspective on gambling is that it should be treated as a form of entertainment in which one is likely to lose rather than as a form of investment in which one thinks one might win. However, we also think that there should be the right level of legislation, whether it applies to a casino, a bingo hall or an arcade. As has just been illustrated, bingo has been hit heavily by the Gambling Act, as indeed have arcades. Is it not time to support early-day motion 840 and support our arcades, and also to review the use of category B3 machines? We need to stop bingo halls and arcades from closing, thus driving people from a soft to a hard form of gambling in the name of fixed-odds betting terminals.

Gerry Sutcliffe: I think that the hon. Gentleman should be cautious about using the FOBTs argument. As he will know, I have asked the Gambling Commission to consider the impact of high-stake machines and prizes on gambling. I agree that we do not want to do anything that will make problem gambling any worse.
	We are looking at bingo halls and amusement arcades, both the "soft" children's sections of arcades and the adult game incentives. We need to get the balance right. We have received representations from the British Amusement Catering Trade Association, to which I shall respond shortly.

Convergence Think Tank

Bill Wiggin: If he will publish the minutes of the meetings of the convergence think tank; and if he will make a statement.

Andy Burnham: The Government intend to publish the proceedings of all the convergence think tank seminars on the dedicated website. Most of the proceedings of the first seminar on 7 February this year will be posted on the website today.

Bill Wiggin: The Secretary of State did not mention the fact that the convergence think tank is costing some £300,000. Given that Ofcom is doing a great deal of the work, is it not a little tactless to spend that kind of money on so few seminars—I believe that one of them is on Arsenal football club—when the portable antiquities scheme and hundreds of other arts organisations are fighting for survival as a result of Government cuts?

Andy Burnham: The hon. Gentleman is scraping the barrel in trying to find a subject on which to launch an attack. This issue is of huge importance to the whole of British society; it is about people's ability in a fully converged digital world to get access to high-quality content. It is important that there is the widest possible debate among the telecommunications, media and other industries on developing a sensible and consensual policy to take us through this changing world. The process mentioned, led jointly with the Department for Business, Enterprise and Regulatory Reform, is a good example of how Government should make policy; listening to the views of industry, working closely with consumer groups and, at the end of the day, coming up with the right answers. The money spent on that process will be well spent.

Andrew Miller: My right hon. Friend will remember that way back in time—in respect of the Broadcasting Act 1996—it was argued, by the technical director of ITV, I think, that convergence had happened and that we were now dealing with a series of subsets of the same technology. That is the case and now, after several years of Ofcom, is it not time to consider looking carefully at the size and shape of the umbrella that we created to produce Ofcom and to determine whether it meets the needs of current developing technologies?

Andy Burnham: In the short time that it has existed, Ofcom has been incredibly successful in establishing an authority and a clear lead on these important issues. The difficult question to answer in terms of the changing communications industry is how we in this House keep pace while ensuring that the legislative environment is not a barrier to the industry's success. That is the line we have to tread. In those circumstances, it is very important that we work with our regulators and industry. That is why we have established this process. A similar process led to the creation of the Communications Act 2003, which has been a success.

S4C

John Spellar: How much his Department has paid to S4C in 2007-08; and what his estimate is of the level of such payments in 2008-09.

Andy Burnham: The grant in aid payment to S4C in 2007-08 is £92,817,000. The grant in aid estimate for 2008-09 is £98,112,000.

John Spellar: I am trying to work out how to get my congratulations to West Bromwich Albion on reaching the FA cup semi-finals into my question, but I fear that I shall have to confine myself to asking the Secretary of State why, with all the valid demands on his Department's funds, it has spent £0.5 billion over the past six years propping up this television station. Would it not be better to transfer responsibility to the Welsh Assembly so that it can decide and, if it wants to keep it, it can pay for it?

Andy Burnham: Tempted as I am to stray into football matters, I think that I had better answer my right hon. Friend's question directly. As he will know, broadcasting is a reserved matter, which is right as it affects the whole of the United Kingdom. It is important that the traditional strengths of British public service broadcasting be maintained and built upon. Colleagues representing Welsh constituencies might have a different perspective than my right hon. Friend on the issues he has raised. The funding settlement for S4C has worked well and it has worked within the overall British context in which we consider broadcasting.

Topical Questions

Mark Pritchard: If he will make a statement on his departmental responsibilities.

Andy Burnham: Two events this week highlight the vital role culture, media and sport play in the economic and social life of the country. I have just come from the launch of British tourism week. Tourism is incredibly important to people in constituencies up and down the country. We have a fantastic product to sell and a tremendous opportunity in the run-up to the 2012 Olympic games, and I hope that Members of all parties will get out this week and support this important initiative in their constituencies. At the end of the week, there is Sport Relief, an event that shows the unique power of sport to bring communities together and to get people to be active and have fun while raising money for people in need in the UK and in some of the poorest countries in the world. I think that there are a few candidates in this House who could do with getting out and doing a bit of sport and physical activity this weekend.

Mark Pritchard: Although many in this House are looking forward to the Beijing Olympics, why do the Government continue to turn a blind eye to the Chinese regime's human rights abuses, unspeakable animal cruelty and continual repression of religious minorities?

Andy Burnham: My right hon. Friend the Minister for the Olympics rightly pointed out that we negotiated free expression for journalists attending this year's Olympic games and free movement in China. Sport is an incredibly important way of bringing the world together, and we can then discuss and address issues of common concern. The Government raise issues of China's approach to human rights around the world in all our meetings with Chinese counterparts. It would be wrong to confuse such issues with regard to the Olympic games this summer. We have known about the games in China for a long time, and we must work to make them as successful as possible, while using them as an opportunity to raise issues of concern to the whole world.

Geraldine Smith: As we celebrate British tourism week, what can we do to encourage overseas visitors to visit not only London, but our coastal resorts? May we have a marketing campaign aimed at promoting those resorts?

Margaret Hodge: As my hon. Friend knows, because I have met her and some of her constituents to discuss that matter, we are investing £45 million specifically to regenerate some of our coastal resorts that have not adjusted to changing patterns of domestic tourism. I hope that her area will benefit from that. London is a successful destination for many inbound tourists, but I agree that we must see it as a gateway through to the rest of this country's fantastic resorts, countryside, heritage and history. We are doing that, using 2012 as a catalyst. Some 80 per cent. of our tourism income comes from people in Britain, so it is also hugely important to build on that.

Don Foster: Forty per cent. of off-licences recently surveyed were selling alcohol to people who were under age and the Government claim that they will get tough. Will the Secretary of State confirm that, in 2005, the Government said that the Licensing Act 2003 would introduce the forfeiture of a personal licence for under-age sales "at first offence"? If that is the case, why is the Government's new tough action to move to forfeiture not after first offence but after second offence? What does he think of Conservative proposals to move it still further to third offence?

Andy Burnham: In publishing the Government's first review of the 2003 Act last week, I made it clear that there is a mixed picture around the country. Alcohol consumption has decreased in the past couple of years, but we did acknowledge problems, particularly the increase in the number of offences in the early hours of the morning. I do not think that there is any division in the House on sales to children—we all want the full use of the 2003 Act's powers to tackle that. It is right to say that some have used the freedoms that the Act grants but not necessarily all its powers. We sent a clear message last week in publishing our review that licensing authorities should use all the powers available to them and that they should particularly target the sale of alcohol to under-18s. I believe hon. Members on both sides of the House would support that.

Chris Bryant: With the Welsh singer Duffy at No. 1 in both the singles and albums chart and the Welsh team having won the triple crown on Saturday and almost certain to win the grand slam this coming Saturday, may I urge the Secretary of State to give a rather more enthusiastic response to my right hon. Friend the Member for Warley (Mr. Spellar) on S4C? The Secretary of State's predecessor suggested that he was open to the idea of S4C being devolved to the Welsh Assembly, so is it not time that we did that? In addition, will he sponsor me in April's London marathon?

Andy Burnham: My hon. Friend is nothing if not an opportunist. Of course I shall sponsor him, and I wish him well in that endeavour.
	My instinct is to preserve what is good about British broadcasting. I do not want to break it down and lose one of its great strengths, which is in bringing the whole country together. It reminds us what is great about this country, and it is right that it is a reserved matter so that we can consider it in the round at UK level. However, I am always ready to listen to representations from my hon. Friend, and I am happy to meet him to discuss the matter further if he wishes.

Norman Baker: The Secretary of State said a moment ago that the Chinese had made a number of promises in order to secure the Olympic games in Beijing. Does he accept that they are not keeping them? They are not keeping their promises about free access for journalists or human rights. What will the Government do to ensure that the Chinese keep their promises rather than simply sign pieces of paper? Does he agree that athletes who want to make objections about human rights abuses should be able to do so?

Andy Burnham: The hon. Gentleman is right that promises were made, and it is incredibly important that they are kept. The Minister for the Olympics has just told me that she regularly raises the matter with the Chinese authorities and that she has also raised the unblocking of the BBC website with them. As we move towards the Olympic games in Beijing, it is important that we continue to make those representations and ensure that promises given are promises kept. I welcome the fact that the hon. Gentleman has raised this important matter. We must ensure that we have a successful Olympic games in Beijing, but also that we raise issues of concern as we approach the games.

Lindsay Hoyle: A topical subject for my right hon. Friend is the opening of the Leigh sports village, which is enviable and a great asset for Greater Manchester. What can he do to ensure that funding is available for a sports village in Lancashire? There would be no better place for it to be based than Chorley.

Andy Burnham: I bow to no one other than my hon. Friend in making the case for our local area. If he looks down the M6 at our sports village—

Lindsay Hoyle: With envy.

Andy Burnham: It is a tremendous project that embodies how sport can regenerate an area that has had difficult times over the years, and it is a tremendous success. I hear what my hon. Friend says about the efforts to do something similar in Chorley. I think that he has ambitions for Chorley to be used as a base for the Olympics, and I want to work with him on that. The model that we have developed at Leigh can provide an excellent example of how to use sport to regenerate towns such as Chorley.

Jeremy Hunt: Going back to the Licensing Act, if the problem was the signal that it sent to a minority of binge drinkers, does the Secretary of State agree that the solution is not to punish the majority of responsible drinkers, the 37 million who enjoy an innocent tipple or two? They should not be made to pay the price for the total failure of the Government's alcohol policy.

Andy Burnham: I agreed with the shadow Secretary of State until his last point. He expressed well the fact that a balance must be struck when dealing with problems that arise in an area. As I mentioned a moment ago, the Act provides many powers to do precisely that without penalising the vast majority of people, who want to enjoy a relaxed drink at a time of their choosing. He will have seen in our review last week that on average, opening hours have increased by only 20 minutes. There has not been a huge change in the time at which pubs and clubs close, but the Act has given some people the ability to enjoy a drink later than they previously could. Local licensing authorities should use the powers that they were given if there is clear evidence of a breach of licensing conditions or if public disorder arises from drinking establishments.

Bob Russell: The Secretary of State will know that the elitist snobs who run Arts Council England are spending more money on promoting contemporary Latin American art than on promoting England's traditional, working-class folk dance and song. In view of the Secretary of State's commitment to five hours of culture each week for schoolchildren, will he join me in meeting the English Folk Dance and Song Society to see how much England's traditional folk dance and song can be included in those five hours?

Margaret Hodge: The hon. Gentleman's comments demonstrate why it is so important that politicians do not get involved in determining how the allocation of funding should be distributed between various organisations. That is why the arm's length principle, which has been established for many years, is the best way to ensure that the most excellent of our artistic organisations get the funding that they require. If the hon. Gentleman wishes to meet me on the subject of English folk dancing, I shall be happy to do so.

Laurence Robertson: The Minister for Sport will be aware that on Friday the Totesport Cheltenham gold cup, which is the highest quality steeplechase in the world of racing, will take place in my constituency. He will also be aware of the concern caused throughout racing by his announcement last week that the Tote would be sold on the open market. The Tote was set up 80 years ago purely to benefit racing. No Government have ever put any money into it. Is it not wrong that the Government should seek to obtain some £400 million from selling the Tote? If Europe is the problem, should not the Government go back to Europe and try to get the classic fudge that is always available? Will the Minister go back to Europe and say that this was about not state aid, but a small administrative change?

Gerry Sutcliffe: I look forward to joining the hon. Gentleman at Cheltenham this week. He has worked very hard on the Tote and I listen with great interest to what he has to say. He will know that we have to get the appropriate price for the Tote, but everything is on the table. He will be aware of my statement last week, and we now look forward to discussions with the Tote and anyone else who is interested to ensure that we can benefit racing in some way.

Anne McIntosh: If the Secretary of State is serious about British tourism week—I hope that he is—will he make representations to the Chancellor of the Exchequer not to put a further tuppence on fuel duty, as that would single-handedly destroy rural tourism in North Yorkshire?

Andy Burnham: Decisions about taxation are, of course, a matter for my right hon. Friend the Chancellor to make in the Budget. He will come to this House later this week with those conclusions. I think that the hon. Lady might be overstating the case somewhat. The British tourism industry has posted some encouraging visitor numbers recently, despite the difficulties that were faced because of foot and mouth disease and last summer's floods. Of course, a lot of issues can impact on our tourism industry and the hon. Lady is right to challenge me and my right hon. Friend the Minister of State to do all we can to support the British tourism industry, particularly as it has faced challenges in recent times. I assure her that I shall continue to do that.

MINISTER FOR THE OLYMPICS

The Minister for the Olympics was asked—

Costs Estimate

David Evennett: What her most recent estimate is of the costs of the Olympic games 2012; and if she will make a statement.

Tessa Jowell: The cost of the games remains within the overall funding package of £9.325 billion that I announced in March 2007. As the House will no doubt recall, that was confirmed in my written ministerial statement on 10 December 2007, which provided further details of the Olympic Delivery Authority's baseline budget. The overall cost of the main venues remains broadly in line with the bid book that we submitted in support of our bid, taking into account the difference in time between the submission of the bid book and the games and therefore allowing for inflation, VAT and the provision of contingency consistent with industry best practice.

David Evennett: I thank the Minister for that comprehensive answer. However, it was recently revealed that the Department for Culture, Media and Sport is spending an average of £1 million a week on consultants. My constituents are naturally concerned about that figure. Will the Minister assure me and the rest of the House that we are getting value for money from those consultants and that the budget will not spiral any higher because of increasing consultancy fees?

Tessa Jowell: I do not recognise the figure that the hon. Gentleman quotes, but I am happy to write to him on the issue. Certainly, in the early days of the Government Olympic Executive, consultancy was used while the unit's capacity was being established, but recruitment has now delivered high quality staff who have a key responsibility for making sure that the public investment in the games is safeguarded.

Chris Bryant: Will my right hon. Friend confirm that a significant amount of money in the Olympics budget is devoted to making sure that volunteers from across the country can come to London and take part in the running of the Olympics? It would surely be unfair if a young person from the Rhondda found it more expensive to help out than a young person from Kensington and Chelsea.

Tessa Jowell: Let me answer that question in two parts. Certainly, the Olympics will act as a catalyst for an enormous increase in voluntary activity right across the country; that is clear. We want to support that and to support communities in doing it, whether through schools, clubs for elderly people or sport clubs. There is also the issue of the 70,000 volunteers that the London Organising Committee of the Olympic Games and Paralympic Games will require for the games. I join my hon. Friend in underlining the importance of recruiting those volunteers from across the country; that is consistent with our message that the Olympics are the UK's games in London.

Hugh Robertson: As both a London MP and the Minister for the Olympics, the right hon. Lady is well aware of the current controversy about the closure of local authority swimming baths and the lack of 50 m pools in London; it has much fewer than any other capital in western Europe. Will she confirm to the House today that she will be able to draw on lottery cash when she puts together her plans for the Olympic sporting legacy, and that she intends to put swimming at the centre of that sports legacy?

Tessa Jowell: The hon. Gentleman will know that last week, the schedule of over 600 venues for training camps, approved by international federations, was published by the organising committee. The camps are all over the country, which is a mark of the very high standard of facilities in the UK. On his specific point about swimming, there are risks in making generalised commitments about the retention or otherwise of individual swimming pools. I am sure that he and I share the aim of ensuring that more young people—and indeed people of all ages—take part in swimming. We know that modern facilities and coaching are the best way of attracting people to take up new sports. I do not think that we should necessarily hang our hats on the retention of every swimming pool, but we should continue the drive, which has been so successful since 1997, to refurbish and increase the number of facilities. That is why more children and young people are playing sport.

Don Foster: The Minister rightly says that one of the important reasons why we are expending so much money on the Olympics is to ensure the legacy, and not just deliver the games. However, a far greater amount has now been taken from the lottery to meet the costs. The amount is equivalent to a £1 million cut in every single right hon. and hon. Member's constituency. That will seriously damage the ability to provide support for grassroots arts, culture and heritage, and to provide the necessary legacy. Will she tell the House what she personally has done to persuade the Chancellor, in his Budget on Thursday—[Hon. Members: "Wednesday!"]—sorry, Mr. Speaker; Wednesday—to change the taxation of the lottery, so that more goes to the Treasury and back to good causes?

Tessa Jowell: The hon. Gentleman knows very well that discussions are under way. At the time of the Payments into the Olympic Lottery Distribution Fund etc. Order 2008, the then Secretary of State for Culture, Media and Sport, my right hon. Friend the Member for Stalybridge and Hyde (James Purnell), made it clear, without pre-empting the outcome, that there was a commitment to looking at gross profits tax as an alternative tax regime. In addition, the new lottery licence is expected to increase the income available for good causes. The hon. Gentleman has been thoroughly briefed on the issue, so he will know about the efforts that were made, successfully, to ensure maximum protection for good causes. I know that, like me, he will recognise that between now and 2012, the Olympics is a legitimate, additional good cause. Nothing will impel young people to take up sport in quite the same way as the Olympics in London in 2012.

Target Shooting Sports

Henry Bellingham: What plans she has to ensure that the 2012 Olympic Games result in a long-term legacy for target shooting sports.

Tessa Jowell: The shooting facilities for the games at Woolwich will be temporary. LOCOG is looking at ways to ensure that the design and construction of the facilities there will be relocatable and therefore reusable. In addition, LOCOG is committed to the distribution of the equipment after the Games. As for Woolwich itself, over the months and years ahead LOCOG and the Olympic Delivery Authority will discuss further with the Royal Artillery barracks, the Home Office and Greenwich council what is practical in terms of legacy at Woolwich after the games.

Henry Bellingham: I thank the Secretary of State for that answer, but is she aware that the £25 million to be spent at Woolwich will leave no legacy, because those ranges will be dismantled? It is difficult to envisage that they could be transported somewhere else. Why cannot the shooting sports events take place somewhere else? What will she do to help British pistol shooters who want to train for their sport prior to 2012?
	[Hon. Members: They will have to go to Switzerland.]

Tessa Jowell: In some cases, yes. However, there has been an enormous write-in campaign on the subject by Members in all parts of the House, and I am aware of the active lobbying that has taken place. The judgments about the suitability of Woolwich were taken by the organising committee, now the governing body, and the international federation and the International Olympic Committee, who made clear their view that if the facilities were more compact—that is, nearer the main park—our bid would be more likely to succeed. There is a not a need for legacy from shooting in the same way as other sports, as there is a world class facility at Bisley. However, to some extent legacy will be provided by the fact that the facilities of Woolwich will be relocated. The decision has been carefully reached and my understanding is that it is broadly supported by those in the shooting federation who had been arguing for an alternative.

Andrew Love: The legacy from the Olympics will include a substantial regeneration of a major part of five London local authorities, some of the most deprived areas of the country, in the lower Lea valley. What opportunity has my right hon. Friend had to speak to the Lea valley authority and the local authorities concerned about expanding that regeneration to other parts of the Lea valley?

Tessa Jowell: I thank my hon. Friend for that question. As one of the MPs in one of the constituencies, I pay tribute to the work that he has done to secure regeneration in his constituents' areas. I have had a number of meetings with the local authorities and the Lee Valley Regional Park Authority. As he knows, we are about to launch the consultation on the master plan, already thinking about the governance and the running of the Olympic park and the area around it after the games are over. The Olympic park regeneration will bring about major regeneration, inward investment, a broadcast and media centre one and a half times the size of the Canary wharf tower—

Mr. Speaker: Order. May I stop the Secretary of State? I call Mr. Harper.

Olympic Legacy

Mark Harper: If she will make a statement on the legacy of the 2012 Olympic and Paralympic Games.

Tessa Jowell: The question picks up the important point about legacy. The Government's position is clear. The strength of the legacy left by the Olympic games is as important as the quality of the sporting experience and its delivery on time and on budget. The lasting legacy is being developed around five specific ambitions—sport, young people, jobs and skills, sustainability and the regeneration of east London. We will shortly publish the first of the detailed plans indicating how the legacy will be realised across Government.

Mark Harper: One of the legacies of the Olympics should be a more accessible transport system in London. What assurances has the Minister received from the Secretary of State for Transport that the collapse of Metronet will not delay the development of a more accessible underground beyond the Olympics, which would damage that accessible transport legacy?

Tessa Jowell: All the transport infrastructure will meet the highest standards of accessibility. As the hon. Gentleman knows, between now and 2012 London's transport will benefit from investment of more than £11 billion with Crossrail to follow, which is why it is important that London has a Mayor who understands the importance of transport to the people of London.

Estimates day
	 — 
	[2nd Allotted Day]

SUPPLEMENTARY ESTIMATES, 2007-08

HM Treasury

Northern Rock and Banking Reform

[Relevant document:  Fifth Rep ort from the Treasury Committee, Session 2007-08 , HC 56, entitled The run on the Rock. ]
	 Motion made, and Question proposed,
	That, for the year ending with 31st March 2008, for expenditure by HM Treasury—
	(1) further resources, not exceeding £7,092,000, be authorised for use as set out in HC 366,
	(2) a further sum, not exceeding £11,841,000, be granted to Her Majesty out of the Consolidated Fund to meet the costs as so set out, and
	(3) limits as so set out be set on appropriations in aid.— [Alison Seabeck.]

John McFall: It is a pleasure to open today's debate on Northern Rock and banking reform. The Treasury Committee was quickly off the mark with this investigation. On 20 September, the Governor of the Bank of England and his colleagues came to the Treasury Committee ostensibly to consider a report on inflation, but in particular to discuss the issues surrounding Northern Rock. In the intervening period, we produced two reports, "The run on the Rock" and "Financial Stability and Transparency".
	I thank my colleagues on the Committee for their commitment and hard work in producing those two reports in the past few months. The reports are unanimous, and to date they have been well received by Parliament and the outside world. I also want to put on the record my thanks and those of my colleagues for the hard work of the staff and for the leadership of the Clerk of the Committee, Colin Lee. A tremendous amount of work was involved, but the staff stuck to the task. One measure of their success was that the report was out in time for the Government's consultation exercise at the end of January.
	The Committee examined what went wrong with Northern Rock and recommended changes in banking law, regulation and practice, with the aim of ensuring no repetition of the Northern Rock saga. My speech has three parts. First, I will present the Treasury Committee analysis of why Northern Rock needed state support in September and how the tripartite authority responded to that. Secondly, I will briefly examine the available information on the extent of state support to Northern Rock. Thirdly, I will consider banking law and regulatory changes, which are reflected in the Treasury Committee report and in the Government's proposals.
	Turning to the first item, what went wrong? Undoubtedly, Northern Rock employed a reckless business strategy, and the executives and the non-executives did not live up to their responsibilities.

Andrew Miller: Did my right hon. Friend find any evidence on how the executives reported their actions to the shareholders? Did his Committee identify any weaknesses in communications with shareholders?

John McFall: With regard to the executives, I have mentioned that the business strategy was reckless. The non-executives gave the chief executive, Adam Applegarth, his head, and no company should aspire to that model.
	The other aspect of what went wrong with Northern Rock was that it relied on the wholesale markets—in other words, it drank from one well, which was a reckless business strategy. The non-executives should have been asking questions such as, "Why are we doing so well?" In the first six months of 2007, Northern Rock was responsible for 19 per cent. of all new mortgage lending. Both the execs and the non-execs did not address basic questions.

Alan Beith: Many of us are receiving representations from former Northern Rock shareholders who say that the Financial Services Authority's failure to recognise the dangers in that business model ought to be a factor in the consideration of what compensation should be paid to shareholders. What is the right hon. Gentleman's view on that?

John McFall: I do not want to get into pronouncing on the shareholder issue; today, I am focusing on our Committee's report. However, I am coming to the FSA and its failings, so I will take up what the right hon. Gentleman has mentioned.
	The FSA failed because early warnings were ignored and there was an inappropriate FSA response. The Committee was concerned about the resources used in supervising Northern Rock, particularly in the light of what we called the "outlier status" of the business model. For a year or two beforehand, there had been murmurings about the type of model that Northern Rock was following. My own opinion is that the FSA gave its best regulators to the large banks and its less well-accomplished ones to the smaller banks and the building societies; it thought that it had to keep its eyes on the big banks and it let the former building societies go. The FSA has learned that lesson; from my personal discussions with FSA officials, I can say that the point has been well taken.
	There were also shortcomings in the legal framework. There was no special administrative system, such as that in the United States of America, for failing banks. Furthermore, a legal uncertainty seemed to prevail with regard to the European Union market abuse directive. That issue needs further examination—not only at a UK level, but at a European level.
	One basic question that the Committee asked itself was whether Northern Rock was a systemic bank. We concluded that it was. It had grown over the years, certainly since demutualisation, but it was not a huge presence other than in its heartland area of north-east England. In essence, it was systemic because it identified weaknesses within the tripartite system for dealing with failing banks. Depositors could get only £2,000 of their money in full, so when a run started, they were likely not to get the full amount and also likely not to get it soon. As the Governor of the Bank of England stated during his appearance before our Committee, once a run had started it was logical for people to queue up for their money. The Northern Rock run was a message to consumers that other banks might be weakened by the crisis and that they, too, could lose deposits. There was a spectre of contagion, and it comprised a systemic risk.
	I well remember getting a phone call at home one evening from a constituent who told me that he and his wife had their money in Northern Rock. They had not had much money for most of their married life, but had received some lately and put it all into Northern Rock. He asked me for advice on whether he should take it out; that was a rather awesome task for me. I told him that because the Government were supporting the bank, he should keep it there. However, there was a real concern among people, who took a logical stance, about the future of Northern Rock and of their deposits.
	The Committee concluded that the Chancellor was right to authorise the support operation for Northern Rock because of its systemic nature. The Northern Rock failure identified to the public a lack of protection for depositors and further weakened the confidence in which financial institutions were held in the public eye. A run on other banks and a more widespread systemic failure could have been possible.
	The Committee also identified a failure of the tripartite authority in respect of the handling of an announcement about the problems of Northern Rock and the support being provided to it by the authorities. The announcement that public funds were being injected into Northern Rock should have reassured the public; perversely, however, it led people to see the bank as fatally injured—hence the run. That was compounded by a lack of speed as regards the support operations announced by the tripartite authority. Everyone was aware that a leak was possible, yet when the decision to proceed with the support operation on Tuesday 11 September was made, it was not to be announced until Monday 17 September—that was far too long a period. In my opinion, no journalist can be blamed for the leak. Rumours were circulating prior to the press statements, and a leak to the press was a matter of when, not if. The Committee concluded:
	"In failing either to make an announcement earlier in the week or to put in place adequate plans for handling press and public interest in the support operation, the Tripartite authorities and the Board of Northern Rock ended up with the worst of both worlds."
	That was exacerbated by the failure to prepare for the Government guarantees for the Northern Rock depositors. The Committee says:
	"It is unacceptable, that the terms of the guarantee to depositors had not been agreed in advance in order to allow a timely announcement in the event of an adverse reaction to the Bank of England support facility."
	Had such preparations been made, Northern Rock might not have been as weakened by the run as it was.
	The second issue is the extent of state support and the accountability for that public commitment. Concerns have been expressed regarding the lack of transparency in the state support appropriate to maintain the bank, given that we are being asked to approve the revised spring supplementary estimate, page 22 of which shows that the first two commitments are there, but with no moneys against them. Public accountability is very important, and those columns should be filled in by the Government, not just left blank. In the initial stages of the crisis, and prior to public ownership, the Treasury incurred contingent liabilities relating to its underwriting of the Bank of England support operation and the guarantees that it offered to Northern Rock—the first two elements in the spring supplementary estimate. I am making a plea for the Treasury to be more forthcoming in reporting such contingent liabilities.
	The third and final area to which I wish to refer is banking reform. Banks must be allowed to fail, because market discipline must form the core of banking regulation in the United Kingdom. If the likes of Northern Rock take unacceptable risks and the market turns against them, they should be allowed to go to the wall. The profits from banks cannot be private while the risks of their failure are public. However, that failure must happen in an orderly manner. In the case of a company, the shareholders must be the key losers. Small depositors should not lose out, nor should they lose the banking services needed to operate in our modern economy. Those who are financially excluded in this society are socially excluded, so it is important that they do not lose out.

Mark Field: The right hon. Gentleman has uttered the usual incantation about not privatising the risks and ensuring that we have the profits in the public sector, but that is not quite the case for a bank, which is a very different kind of organisation. Because of the risk of contagion in the entire banking system, the risk in relation to depositors must ultimately be in the hands of the state, in some form or another, whether through the Bank of England or the Treasury, or in some other way. The depositors need to be looked after, and to that extent there must, if we are to have a working banking system, be some opportunity for intervention to take place. The right hon. Gentleman seems not entirely to recognise that banks are different organisations from the average public or private company that is about to go down.

John McFall: I could devise a great headline for that intervention along the lines of, "State Support Essential for Organisations that Made £40 Billion in Last Fiscal Year". The hon. Gentleman should get real and understand that banks have to operate in the market like everyone else. The depositors, however, need to be protected because they cannot do due diligence with regard to the Royal Bank of Scotland, Barclays, Lloyds or whatever. We all recognise that.
	That point leads me on neatly to the depositor protection fund, which is a key way in which small depositors can be assured in times of crisis that their funds are there and can be made available quickly. The Treasury Committee recommended a pre-funded system for that process. The benefits we identified were that it would reassure depositors that their money is there and that they can have it, and prevent banks from being called upon in times of crisis to bail out their insolvent competitors' depositors. On the pre-funded aspect, funds should be allowed to build up in good times so that they are available when things take a turn for the worse.
	Why did we recommend pre-funding for banks? It is obviously the case that banks have a responsibility to provide funds that assist in the maintenance of consumer confidence in the industry. We acknowledge that the Government might have to provide funding for the depositor protection scheme in case of a systemic difficulty, but a single bank—this is a lesson for the future—should not require Government support. We must put in place a mechanism to ensure that.
	It could be said that this is not the time for banks to pay into such a fund. The hon. Member for Sevenoaks (Mr. Fallon) and myself went to the United States in December— [ Interruption. ] We did so with the approval of the entire Committee, to talk to the Federal Reserve, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and others, and we took the opportunity to meet the American Bankers Association. I felt that the ABA would disagree fundamentally with us about a pre-funded scheme, but it encouraged us with respect to such a scheme, saying that it was important for consumer confidence. The support of such an organisation, which represents American banks, is a big plus in terms of having a pre-funded scheme.

Adrian Bailey: I have listened carefully to what my right hon. Friend is saying, and having read his report, I understand the rationale. However, will he make it clear whether he is referring specifically to the proprietary banking sector, or would he include the mutually based building societies in such a scheme?

John McFall: That is still to be worked out. We are looking at the banking sector at the moment, but the Government's consultation is open on that matter. I suggest that my hon. Friend contributes to that process, because I know that he is interested in the mutual sector. The Committee suggests that the Government provide initial funding through a loan that the banks pay back as they become less constrained. There is a role for Government in the process.
	The report, "Financial Stability and Depositor Protection", is out for a consultation exercise, and it is clear that the Government and the Committee agree on a number of issues. The first thing we agree on is the need for a prompt, corrective action system. If such a system were in place, it would prevent a failure in the first place. Secondly, we agree on the need for a bridge bank authority, which would allow failing banks to be taken into public ownership and allow them to be let out of that ownership, as and when it was convenient. That system exists in America, and it works very well.

Kevan Jones: Does my right hon. Friend agree that there should be some control or regulation over non-executive directors of banks? In the case of Northern Rock, the chairman's only qualification seemed to be the fact that he was the son of Viscount Ridley. The problems that Northern Rock experienced call into question the role of some of the non-executive directors.

John McFall: The prompt corrective action mechanisms should take care of that. I will not follow my hon. Friend down that lane, other than to say that the Committee recommended that chief executives and chairmen of banks should have professional financial qualifications, which the Northern Rock chairman and chief executive did not have. For the life of me, I cannot understand it, but it caused a bit of a stir in the City. It would be wise for a chief executive or someone who chairs a large company to have appropriate qualifications. The whole Committee made that point.
	The communications strategy is another matter on which we agree with the Government. We welcome the Government's commitment to that in the tripartite authority. If there had been a half decent communications strategy in place at the time, perhaps matters would not have worked out as badly as they did. When the announcement of lender of last resort was made, the City and the wider public interpreted it as the financial equivalent of the last rites and evidence that the company was on its death bed, instead of viewing it as the tripartite authority supporting a solvent bank with a good loan book, as the FSA and the Governor of the Bank of England said. The communications strategy was disastrous and the Government and the tripartite authority need to get that right.

Colin Breed: Of course, banks are going to be solvent. Their problem, because of liquidity, is making their assets able to pay their deposits quickly enough. All banks that borrow short and lend long face that problem. Does the right hon. Gentleman agree that it is amazing that the FSA paid little if any attention to banks' liquidity?

John McFall: Given that the hon. Gentleman is an esteemed member of my Committee, I must agree with him. We took evidence on that matter—indeed, the Committee went to Sweden to examine the position there. There was a banking crisis in Sweden in 1991 and the state intervened. The Swedes did not suffer the same liquidity crisis as we did recently because they were aware of the problem. It was astounding that we did not plan for that. Neither did we have plans in place for adequate stress testing. The inadequate stress testing was another example of failure on the part of Northern Rock and the FSA. We need to put those mechanisms in place.
	Let me consider the Government's consultation. I make a plea to them not to allow the financial firms to dominate the debate. I say that in the light of Professor Buiter's comments to our Committee. He said that the FSA regime could have become a "soft touch" rather than a "light touch" one. I do not hold with that point of view, but I do not want one sector to dominate. We must acknowledge that the banks have an incentive to keep the special resolution regime in the FSA rather than the Bank of England's solution, which the Committee is examining.
	The Committee approaches the recommendation from the angle of depoliticisation. Our proposals are intended to ensure that the Chancellor does not need to be involved in many of the decisions about failing banks, except when taxpayers' money is at stake. The Government suggestion of a Cobra-style system may mean too much political involvement. In 1997, there were laudable reasons for moving the Bank of England and the FSA away from the Treasury. As regulators, they need to act in the overall best interests of markets and consumers, not politicians.
	The Treasury Committee therefore disagrees with the Government about where the powers should reside. We believe that the new powers should reside not with the FSA but with the person who takes up the new post of head of financial stability and deputy governor of the Bank of England, and I shall outline the reasons for that. There is a need for creative tension and grit in the system. I remind hon. Members that the deputy governor in charge of financial stability was on holiday in France for a week in August when the financial turbulence occurred. That does not say much for application.
	Secondly, when asked, "Did you do your job?" every one of the tripartite authority members who came before our Committee replied, "Handsomely." But if they all did their job so handsomely, how did we end up in the biggest financial mess since 1880-odd? That is the question that perplexed the Committee. When we asked the Governor of the Bank of England who was in charge, he said, "Well, can you define 'in charge'?" That indicated a real lack of leadership. If we do not get some grit into the system, we could find ourselves in the same situation again.
	Some people will say that that would include overlap. Perhaps there will be overlap; but I would suggest that the tension created could be more beneficial than detrimental. Giving the FSA too much power emphasises the conflicts, but there is already a conflict. The FSA is in charge of prudential regulation, yet it is meant to support consumer interests. That is a conflict of interest. Added to that is the fact that the FSA has a role as regulator, yet also needs to find a private sector solution and oversee the special resolution regime. That is a bit like a surgeon who tells the people he is about to operate on that he has a part-time job as an undertaker, saying, "If the operation doesn't go well, we'll look after you well after that." Let us look into those conflicts of interest and see whether we can get them sorted out.

John Thurso: Does the right hon. Gentleman agree that one of the main lacunae, which he has just identified, was the lack of practice, among the three members of the tripartite authority, of working together on what we identified in the report as war-gaming? Does he agree that if that had taken place, some of the grit that he would like to see might have been identified?

John McFall: I agree with the hon. Gentleman entirely. Again, he is a member of the Committee and contributed greatly to the report. There were no war games taking place. Back in 1997, when the system was established, perhaps it was suggested that it would work because there were four individuals involved: the Governor of the Bank, Eddie George—Lord George—and his deputy, Howard Davies, and the permanent secretary at the Treasury, Terry Burns, and his deputy, Steve Robson. They all knew one other, and might have thought, "If anything goes wrong in the system, we'll be able to sort it out, because Eddie knows Terry, who knows whoever else." However, when the players change, the system must be robust, but it was not robust, so war games are an essential element in ensuring that it becomes so.

John Redwood: When the right hon. Gentleman's Committee looked into the matter, did it come to any conclusion about what fair figures should go into the estimates for the actual costs incurred so far, for the contingent guarantees and for the cash costs of the advances, as it would help this debate very much if we had some figures?

John McFall: That certainly would help the debate, but the Treasury Committee does not have inside information. All of us on the Committee have realised that if we overstretch ourselves, we can make fools of ourselves. We have not overstretched ourselves; therefore our report has been well received. I do not want to get into crystal ball gazing; what I am asking is for the Ministers on the Front Bench to fill in the blanks and to fill them in soon. Then we can have a decent debate on the issue.
	To get back to my point about the overlap, some might say, "This is going against the efficiency in regulation over recent times," but perhaps there is a push back from that. I remember being most impressed during my visit to Washington by the role of the Federal Reserve. There is overlap in regulation there, and we would not want to replicate that in this country. However, once the Federal Reserve has its eyes on something, people perk up and start to listen. One of the tragedies of the situation is that both the FSA and the Bank of England sent out messages to the financial community with their financial stability reports about possible problems in liquidity, but nobody took them on, because there was no mechanism for feedback. In our latter report on financial stability and transparency, the Committee said that those warnings needed to heeded at board level and that a message needed to go back to the FSA or the Bank from the board level saying, "We have looked at the situation." So I hope that that step is taken rather quickly.
	On the efficiency in the market, perhaps we have been overwhelmed by the benign economic conditions and there has been too much complacency in financial institutions to prepare for the bad times, as well as the good times, and the war games and other aspects relate to that. The Government have also said that the Bank of England will have a statutory responsibility, and the Government reforms call for the Bank to have that for reasons of financial stability. I suggest to the Government that that is all well and good, but what instruments are at their disposal to meet that statutory responsibility?
	We need to fill in the individual responsibilities of the authorities, so that they stick to their mandates and so that, with the special resolution regime, we do not get into situations such as the one that we got into with Northern Rock. All that needs to be filled in, because future Treasury Committees could face problems in the financial markets and ask future Governors of the Bank of England why they did not fulfil their duty to protect financial stability, and I do not want them to be told, "Well, it's because Parliament did not give us adequate powers to achieve it, and the FSA did not listen to us when we asked for action." That is what the recommendations of our Committee are about.
	This unanimous report has been well received, and it has cross-party support. The Treasury Committee was the first to the line when the crisis blew up. We have engaged the public in providing a detailed understanding of what went on, and I should like to find from today's debate that that detailed understanding is translated into a detailed prescription, so that we never again have a run on a bank, as we had with Northern Rock.

Michael Fallon: I will not follow the Chairman of the Treasury Committee, the right hon. Member for West Dunbartonshire (John McFall), in a detailed analysis of what went wrong after the events at Northern Rock, although I want to add my tribute to the way that he led the inquiry and drove us forward to produce a report that has been warmly received, not just on both sides of the House but more widely in the City and beyond.
	The debate today is timely. We are in a financial banking crisis, and I do not think that we are near the end of it. We see a loss of confidence in commercial banking, the freezing of the bond markets and, perhaps still to come, the probable unravelling of the carry trade. I start from the position that there is probably no financial crisis that the Government or politicians cannot, if they try, make worse. We should be extremely wary of every temptation to try, not least because not all but some previous regulations certainly contributed to our present discontents.
	Basel I drove the search for yield off balance sheets. The Sarbanes-Oxley Act drove the search for yield across the Atlantic, fired up the City and all our financial services sectors and perhaps made every British building society consider itself the next Morgan Stanley. Some aspects of Basel II may well be unhelpful in binding the extremely conflicted credit rating agencies into the regulatory structure. The answer may not necessarily be instant, knee-jerk regulation.
	It is just worth looking at the Government's consultation paper. It comprises 29 proposals for new legislation, 11 different rule changes for the Financial Services Authority to consult on and a further 23 significant operational changes to the ways in which banks operate—plus a whole load of other stuff, dealing with Scottish and Irish banknotes or the composition of the Court of the Bank of England, which may not directly help us to unfreeze the bond markets but seems simply to have been stuck in there.
	Of course, we have to deal with the failure of Northern Rock. Why did it fail? Who failed? The answer is that they all failed: senior management made mistakes and the non-executive directors failed to check them; the regulator failed to supervise the firm and the tripartite committee failed to keep it out of trouble; and the Chancellor at several key points failed to act promptly and decisively. Even so, I am wary of wholesale legislative reform.
	The first general point—and our Chairman, the right hon. Member for West Dunbartonshire made it—is that regulators must do their job. The FSA did not do its job, as the report makes clear. Of 3,000 staff, only three were directly employed in looking at Northern Rock—the only significant UK bank without a London office. The ARROW—Advanced, Risk-Responsive Operating FrameWork—process, under which Northern Rock was supervised, was conducted once every three years; and the chairman and chief executive lacked any formal banking qualification. We should recall that this was one of the fastest growing UK banks.
	Like the Chairman of the Treasury Committee, I do not necessarily think that we ought to be impressed by the need for tidiness. When we asked the tripartite committee how its members did their job, we found that, as the right hon. Gentleman said, they all liaised and consulted and all did their little bits. Some degree of regulatory overlap would be useful and, so far as the larger banks are concerned, I would like the Bank of England to be given some overlapping power, like the Federal Reserve, to go anywhere, see anybody and ask any questions.
	Secondly, there are obvious gaps that need to be filled—for example, the special resolution procedure, where risk is systemic, and an easily understood compensation scheme for depositors. Those should have been put in place years ago; indeed, the Governor wanted them put in place years ago, and it is for the Government of the day to explain why they were not.
	Thirdly, it is clear to me at the end of this inquiry that the Bank of England should be at the centre of all this. Of course I accept that the Chancellor has to authorise in the last resort the expenditure or commitment of public funds, but I believe that he should do so on the Bank's advice and that the role of the Bank should be paramount. It is the Bank that should have overall supervision of liquidity; it is the Bank that keeps day-to-day watch on the money markets; it is the Bank that should have working knowledge of the bigger banks' operations. That is why I would like to see the Bank of England with its authority restored as a properly independent central bank, not simply the interest rate-setting arm of the Treasury. In the end, it is the Governor—not the Chancellor and not the chairman of the FSA—who should be the ultimate guardian of our financial system. That is why our report proposes new ways to strengthen the Bank's role.
	Beyond that, there is plenty for the FSA to be getting on with to raise its game: greater emphasis on liquidity management, more transparency and much more rigorous stress testing, as has already been suggested. We may need to look much harder at the whole issue of external validation. It would be fair to say that the Select Committee was unimpressed with the role of the credit rating agencies, which seemed to us hopelessly conflicted. One credit rating agency had taken over £3 million in fees from Northern Rock alone.
	We also looked hard at the role of the auditors. I do not understand how auditors can give a full, fair and firm opinion but exclude any treatment of the off-balance-sheet vehicles. I find it troubling that Northern Rock's auditor earned nearly three times as much in non-audit fees—in consultancy fees—for arranging the securitisation of Northern Rock's off-balance-sheet vehicles, as it did for the audit, which of course excluded them. I find that troubling.
	I conclude by raising two wider but related issues. The first is what we mean by financial stability and the systemic risk to it, and the second is the extent to which we can still regard banks as market institutions rather than public utilities. When I posed the first question on Second Reading of the emergency legislation a few weeks ago, I did not get an answer. I think that we need one, however, so let me put it a different way. In the 1970s, the Soviet Union had financial stability and Hong Kong probably did not, but I know which market we would probably all prefer to invest in. Financial stability is something we all say we are in favour of. In Juvenal's great phrase, "Laudatur et alget"—it is praised, but cold-shouldered. We say we want it, but we certainly are not content with it. We do not expect our bank to deliver it. We do not expect our pension fund to deliver simply stability. We do not expect our investment manager to deliver stability. We expect them, on the contrary, to search continually for better yield in this era of low inflation—to achieve higher than average rates of return, even as inflation disappears globally.
	Indeed, if something then goes wrong with that search for yield, we do not restrain ourselves from trying to establish, as we heard from the Liberal Democrats, an attempt to prove regulatory failure. If we do not get the yield we expect—if something goes wrong and our investment seems to sink—our constituents will try to secure regulatory failure and then demand a form of compensation. That is why we have to be extremely careful about the concept of financial stability and how we define systemic risk to it, otherwise, there is no bank, no building society and no investment that can be allowed to fail if enough of our voters are committed to it. At the end of all this, I would prefer a definition of exactly which financial institutions are systemically important. I would like that defined, perhaps by the Bank of England in its financial stability report, but certainly by an authority independent of Government, not by shifting political calculations and emergency meetings of Ministers, so that it is clear to everybody which financial institutions cannot be allowed to fail and which ones still can.
	The second related question is, what are banks today? Was Northern Rock, for example, really a bank? It had remarkably few depositors. It seemed to me much more of a finance house—a rather poor Tyneside imitation of Morgan Stanley—borrowing money from around the world and betting on future movements of interest rates. To what extent are all our banks and building societies really market institutions? Are they instead public utilities, still dependent on implicit public subsidies when they fail?

John Thurso: I am following the hon. Gentleman's argument closely. Does he agree that the critical factor is the depositors? If the depositors and the need to protect them are taken out of the equation, we arrive at something that one could probably allow to fail.

Michael Fallon: That is certainly one way of defining it. Very big UK banks may be in the system which, for other clearing and operational reasons, one would not want to see fail. However, I think the hon. Gentleman agrees that we must have a clearer definition of what systemic risk actually is.

Andrew Love: Is not the problem with defining which banks can and cannot fail that we are giving an implicit Government guarantee and therefore creating an unlevel playing field which those that do not have that guarantee will complain about?

Michael Fallon: They certainly will, but one starts from a position that includes the very large, major UK banks and works outward from there. I do not envisage the risk to be very large. What needs to be clear is that the House would be prepared to see the vast majority of banks and almost all building societies fail provided, of course, that the depositors were properly protected; otherwise, we will not have a market financial system at all.
	Let us not forget that banks have been extremely profitable in recent years. Some of the British banks are world-class players. They have been extremely profitable for UK plc and for their shareholders, but they have also been profitable—very profitable—for their senior managers. That profitability, and some of the vast salaries involved, may now need to be priced a little more realistically. I should like the capital and liquidity requirements laid down for those banks to be readdressed. The House must never again be put in the position of suddenly having to commit more than £100 billion of public money.
	There are lessons from Northern Rock. There are lessons for the regulator that failed in its duty, for the tripartite arrangement that could not deal with the consequences, and for the Government who fatally dithered; but, ultimately, there are lessons for us all.

Frank Dobson: It is important for us not to confine our thoughts about the future regulation of the British banking industry to an attempt to ensure that a crisis such as that at Northern Rock does not recur. There are more fundamental problems affecting the industry, along with its opposite numbers in Wall street and other financial centres.
	It has been notable in recent times that the representatives of the British banking industry, whether appearing on television or radio or contributing to articles in newspapers—backed up by their supporters' club consisting of most of the financial commentators—have been making very gloomy predictions about the economy, about profits, about jobs, about growth, and about the likely impact on taxation in this country. They say that it is all being caused by the credit crunch, but scarcely ever go on to acknowledge that they themselves are solely responsible for the credit crunch— the banking crisis that we face. Their usual targets when things go wrong are public sector pay, trade union militancy, alleged failures in public services, the national minimum wage, which they say will cripple the British economy, and part-time workers seeking security of employment, who will apparently ruin the economy. However, not even the failure of Northern Rock will damage the British economy in anything like the way the banks are damaging it.
	The credit crunch—the financial crisis, the banking crisis, the international banking crisis—was caused because United States financial institutions lost fortunes on what, after things all went wrong, they started to call "sub-prime mortgages", or, in plain English, "lending money to people who could not pay it back", which has generally been frowned on by bankers in the past. Having lost their money, the banks packaged up the loans in new financial instruments with the wondrous title "collateralised debt obligations" and sold them on to a collection of mugs hitherto known as "international bankers".
	CDOs are rather like pre-prepared and pre-packaged supermarket salads, with different assets all chopped up and mingled together, but these packages contained very few genuine assets. The remaining elements were worthless, or rather worse than worthless: they were liabilities. A CDO was a bit like a pre-packaged Caesar salad in which there is one anchovy and all the rest is lettuce, apart from the fact that the package containing the salad is transparent. There was nothing transparent about the CDOs; however, they were sold on as top-quality and bought by idiots as top-quality, and the credit rating agencies invariably gave them triple-A ratings. They were risk-free. The banks bought them out of recklessness or stupidity, or perhaps they were deceived, but what is more likely is that they suffered from the worst form of deception—self-deception—and it is they who have got us into this mess.

Kevan Jones: On top of that, does my right hon. Friend agree that it is scandalous that most of the people who were arranging the various financial packages also took huge commissions?

Frank Dobson: They took huge commissions and in the case of some of the American banks when they lost, let us say, $15 billion or $20 billion the chief executive was asked to leave but was given $20 million to help him on his way, so there was in fact no punishment within the system, but there was a reward for grotesque failure.

George Mudie: My right hon. Friend assigns motives to the banks, but he has missed out one of them: greed. Does he not agree that the basis on which they bought these securities was that someone would be prepared to pay them more than they paid, so it was about simple greed? They were not interested in what was in the security. Instead, they were interested in only one thing: can I sell it on—or, in other words, can I pass the parcel and make a lot of money before the music stops?

Frank Dobson: I entirely agree, and I think the hon. Member for Sevenoaks (Mr. Fallon) made the same point in slightly different terms. It is clear that people were behaving like a collection of greedy lemmings. The problem with that is that it is not only they who go over the cliff; does everybody else. If I may mix my metaphors, the lemmings who go over the cliff have a $20 million parachute, but the rest of us go crashing down to the bottom without the benefit of anything to cushion us.
	I do not accept the point the hon. Member for Sevenoaks made in comparing Northern Rock unfavourably with Morgan Stanley, however. Has Morgan Stanley done a good job in this situation, as it has lost $9 billion on sub-prime mortgages? By many standards, the people running Morgan Stanley were just as stupid, ignorant and greedy as those running Northern Rock.
	Another problem is that no one knows what the real exposure is of any of the American banks that committed the original stupidity or the people who then stupidly bought up the liabilities thinking—apparently—that they were assets. Consequently, banks are now frightened to lend to, or borrow from, each other because they fear default as they do not know the extent of one another's exposure.
	Over the past couple of months, however, we have not been hearing from the paid representatives of the banking industry about this fundamental problem that threatens people all over the world. Instead, they appear on television shows to say, "Oh, wouldn't it be horrid if we forced non-dom rich foreigners actually to pay some tax?" or "Oh, don't make people who disguise their income as capital gains actually pay anything like a fair share of tax." Those two issues, both to do with personal taxation, have been a godsend to the bankers because they have used them to distract everyone's attention from the fundamental problems they have dragged us all into.
	The banks have failed the global economy, the credit rating agencies fell down on the job and the monoline insurers failed in their job, so we now have the credit crunch. Sadly, the banking industry is not paying the price of its own failure. If people in other industries now lose jobs as a result of the credit crunch, it will be the fault of the banking industry—of the overpaid and greedy people who were running it worldwide.

Greg Hands: I have been listening to the right hon. Gentleman's tale of woe. May I make a few corrections? First, collateralised debt obligations and collateralised mortgage obligations have been around for 30-odd years. Secondly, they have allowed a huge number of home owners in the United States to have their own home for the first time—such people possibly would not have even dreamed of that 30 or 40 years ago—through the ability to transfer risk. The issue is not the quality of the product or the characters involved in that industry, but the pricing of the products in recent years and the extent to which the activity occurred. That is a fundamentally different question.

Frank Dobson: The hon. Gentleman has not changed the terms of the discussion one jot by that statement. The banks got it wrong and dropped every single one of us in it. It is a tale of woe, because some people will lose their jobs and have their homes repossessed as a result of what has gone wrong, and the banks should take responsibility for it. If the Chancellor has to raise taxes in his Budget on Wednesday, it will be the fault of the banks that messed up the British economy—[Hon. Members: "Oh, come on."] Of course it will. Even the people who write in the financial pages say that the credit crunch will lead to problems for the Chancellor in raising the taxes he needs to provide public services.
	That is why what happens to banking regulation is not just a matter for the banks or the political wing of the banking industry known as the Tory party. The issue affects everybody, and this time everybody must have their say about what goes on. The regulations must be in place in future to protect everybody, not just a charmed circle in the City. We cannot leave the debate about the future regulation of the banking industry to the failures who are running it now. Interestingly, they are exactly the sort of the people who talk about keeping the state out and not wanting the state to interfere. Apparently it is only the British state that they do not like, because some of them are going cap in hand to the Chinese communist state and its sovereign wealth funds, to the Singapore state or the Dubai state. No one in this country has ever been consulted on whether it is a good idea that major considerations about this country's future banking policy should be affected by the interests of foreign Governments. Generally speaking, even the Tory party has been against that sort of thing, but it is what is happening.
	We should not rush into a new regulatory system, because we need carefully to examine how we regulate the banking system. As my right hon. Friend the Member for West Dunbartonshire (John McFall) pointed out, we must have a system in which banks are allowed to fail. The basis of the competitive capitalist system is that people who get it wrong lose out and go down the pan. Our system is that when someone who produces useful IT equipment, builds ships or runs a road transport system gets it wrong they go broke and lose their job, but when someone in banking does the same they do not go broke and do not lose their job, and when someone at the top of the industry loses their job, they get a huge pay off thank you very much. We need a system that allows banks to fail, apart from in respect of depositors. We do not want a system containing 1 million loopholes—that is what this House, for at least the past 30 years, has managed to create in relation to banking regulations.
	In a mostly excellent speech in the Northern Rock debate, the right hon. Member for Hitchin and Harpenden (Mr. Lilley) said:
	"No Spanish banks have any of the problems"—[ Official Report, 19 February 2008; Vol. 472, c. 206.]
	That is because Spanish banking law—not an old Spanish custom that appears to prevail in the City of London, but the new Spanish banking law—will not allow banks not to consolidate off-balance-sheet debt. Spain's new law requires that all debts and obligations be consolidated, recorded and transparent. Lo and behold, the Spanish did not get substantially involved in mad mortgages in the United States.
	I gather from the  Financial Times that the Spanish law has another merit. It has a counter-cyclical arrangement designed to ensure that banks' capital and lending capacity is not reduced during an economic downturn, and that excessive credit is not made available during an upswing. We might discuss what financial stability is, but by and large it is a sound idea for the economy as a whole. It seems that the Spanish system has been fairly sound, which might be why the socialist Government have been re-elected with a bigger share of the vote and more members of Parliament.
	There might be better methods than those used in Spain, but certain aspects of the Spanish system might be of benefit if they were applied here. We certainly need to do better than we have in the past, and we need more effective regulation. What has gone wrong affects every family in the land. We hear a lot about choice, whether it is the parental choice of schools or patients' choice of hospitals, but nobody has had any choice in this case. The banks have lumbered us all with this problem. None of us volunteered for it: the banks created it, and they need to be constrained and restrained if the interests of people in this country are to be protected.
	We have a choice in the next few months. We can either rein in the banks so that they are never again allowed to drop us in it, or we can allow them to bring about the financial ruin of all sorts of people, companies and neighbourhoods. That is our choice—we either do it properly and get it right, or we let things stagger on. If we listen to the representatives of the banking industry, staggering on and feathering their own nest will still be their theme.

Vincent Cable: I start by congratulating the Chairman of the Select Committee, the right hon. Member for West Dunbartonshire (John McFall), and his colleagues on producing a timely and substantial piece of work. Perhaps most remarkably, given the wide dispersal of political views on the Committee, they reached a consensus while being hard-hitting. That was a substantial outcome.
	Rather than go back over who said what to whom when, and who was to blame, it might be useful to be more forward-looking. I shall first ask some of the questions that I do not think the Select Committee asked, and that it certainly did not answer. I shall then turn to the policy implications of its conclusions.
	There were two important sets of questions on which the Select Committee did not focus properly. The first was the nature of the assets of the bank that we have taken over. The major theme of the Committee's criticism, which was right as far as it went, was that the bank's managers and directors made one massive mistake: over-relying on international wholesale markets. The Committee stated that the Financial Services Authority was negligent in failing either to pick that up or, if it did pick it up, to do anything about it. That criticism is fair. However, the Committee largely seems to have taken at face value the assumption that the bank's assets were basically sound. In paragraph 13 of "The run on the Rock", the Committee approvingly cites a quotation from Mr. Sants, stating that Northern Rock had had
	"high quality assets—there is no suggestion here that this is an organisation taking on poor quality assets".
	Northern Rock also got a glowing testimonial from the Governor of the Bank of England, who is quoted at some length. Among other things, he said:
	"What I would say about Northern Rock...is that most of the staff that worked...on the lending side, all the evidence shows, did an excellent job in appraising the loans that they were making, and that they monitored very carefully and did not lend money to people who should not be borrowing from them. The lending side was handled extremely well."
	The issue is left there.
	I wonder how that came to be accepted. I have worried about this from the outset of the Northern Rock affair. The worry centres on the so-called Together mortgages, which are one of the main products of the bank. We know that there are 200,000 of those out of 900,000, which is a big chunk. Those mortgages varied, but the basic principle was that they were well over 100 per cent. of the value of the property—they were usually something like 125 per cent. It seems that the bank was lending a fairly conventional 95 per cent. mortgage to its borrowers and adding on a 30 per cent. unsecured loan, which was typically £25,000. A lot of that happened when the housing market was at its peak last year.
	I wonder how that could possibly have happened. The Governor of the Bank of England and the chief regulator concluded that this was straightforward and uncomplicated and that the assets were perfectly sound. That does not ring true. The Select Committee pointed out that managers were asked to undertake a stress test to see what would happen if house prices fell by 40 per cent. and concluded that the bank was safe and would have survived. I cannot understand how it could possibly have passed that test. Nothing we know about the bank leads us to believe that it would have survived that test, but it has become written into the orthodoxy that it was perfectly sound and secure.

Kevan Jones: Is it not correct that there are two separate items in the mortgage book? There are traditional long-term mortgages, and I know from once applying for a Northern Rock mortgage that they are very difficult to get. There was also the activity described by the hon. Gentleman. His point was backed up by my constituents who worked in the Sunderland processing centre; in the last 12 months, mortgages were being given without any reference to payslips or anything else simply to get the market share up, which was Mr. Applegarth's key thing to boost the share price.

Vincent Cable: The hon. Gentleman makes exactly my point, but he has developed it in a very helpful way.

John Redwood: The way that some might look at it is that what matters is the person's ability to pay the interest and to repay the capital. As long as they do not lose their jobs or mess up their family budgets, it will be quite possible for them to service those debts and repay them even if house prices have fallen. I understand the hon. Gentleman's point that it is not helpful because the security is undermined if there is a big reduction in the market value of properties. In such conditions, it is more likely that people will lose their jobs, but 40 per cent. of the mortgages will not go wrong just because house prices have fallen by 40 per cent.

Vincent Cable: That is a helpful correction. However, the point in answer to both the right hon. Member for Wokingham (Mr. Redwood) and the hon. Member for North Durham (Mr. Jones) is that we now know that over the past few months the Northern Rock management has refused to accept any individual voluntary arrangements. Northern Rock is the only bank that has refused to do that. It is clearly worried about the security of the people who have been lent to. There have been complaints from the Insolvency Service that that is bad practice and against policy. Northern Rock is the only bank that is taking that extremely aggressive approach towards the people who have borrowed from it, as it is worried about conditions such as those described by the right hon. Member for Wokingham.
	We also know that whenever borrowers have got into any kind of difficulty—for example, when they have failed to make one month's mortgage payment—the bank has immediately come in to get a first charge on the property. That behaviour is much more aggressive than that of any other bank around, so why is it doing that? There is clearly a lot of worry in the bank about the quality of its assets.
	The question then arises of what happened to all those mortgages. The answer is that we do not know. They may have been dealt with entirely separately, as the hon. Member for North Durham said. One possibility is that they were bundled together and sold, through the Granite vehicle, on the market. A more likely possibility that follows on from what the hon. Gentleman said is that the mortgages were separated, with the good, traditional mortgages being sold off through Granite—sold through intermediation into markets—and all the unsecured loans being left behind in Northern Rock, which is now a nationalised bank. If that is what happened, the outcome is worrying. It has been worrying all along, both when Northern Rock was nationalised and when it was not, but that is what we are left with.
	I have been trying to secure a proper, independent audit, as have hon. Members from different parties. Clearly, the FSA failed in that task. We need to get a proper understanding of how good the assets really are. The honest answer is that we do not know. I hope that the Select Committee goes further into the issue in future.

Mark Field: I agree with much of the hon. Gentleman's careful analysis. He made the point that ultimately we do not know the quality of the asset book, but he suggested that the fact that Northern Rock was being very aggressive in relation to arrears was somehow a reflection of poor security. It may actually be a reflection of good market practice; it may be ensuring that it protects its interests. That may reflect well on its approach for the future—a subject that I am sure he will come to later in his speech.

Vincent Cable: It may well do so, and as we now own Northern Rock, it may be protecting the taxpayer by taking that approach. None the less, an awful lot of people in distressed situations are being treated far more harshly by the bank than other borrowers. We simply have to take note of that. The hon. Gentleman is quite right: we do not know the answers, and I hope that the Select Committee will go further into the subject.
	There is another set of questions to which we still do not really know the answer. They are about the Granite vehicle. As many hon. Members will remember, the issue surfaced in the last stages of debate on the Banking (Special Provisions) Bill. The Select Committee refers to the issue in its report, and it obviously heard evidence on the subject, but there are big outstanding questions about what is really going on and how Granite will operate in future.
	My first major group of questions is: what are the circumstances in which the Granite vehicle will have to be topped up in future with new mortgages from Northern Rock bank? How will that happen? What mortgages will go into it, and what is the scale envisaged? How will that affect the nationalised company that we have acquired? The other question that I have is: in the documentation relating to Granite, what is meant by the "pass-through event"? I have no idea what the phrase means, but it refers to circumstances in which Granite is effectively closed down and has to pack up. Presumably, in those circumstances, the bondholders lose their money and a complicated set of legal and financial processes are engaged. I hope that in its future work, the Select Committee will help us to understand the issue, because the Government have not been very enlightening and the Select Committee does not say much on the subject.
	Those are two sets of questions that we ought to pursue further. Then there are the policy issues that arise from the Select Committee's work. The Committee is rightly damning about the FSA, but I am left asking, "What does it mean for the future of the FSA and the way in which it carries out regulation?" If it has been excessively indulgent in supervising the bank, what will it do in future if it sees banks behaving in a rather high-risk way? Is it supposed to intervene to stop them immediately? Is it supposed to issue a formal instruction, such as, "You must stop lending"? Is it supposed to have a quiet word in the ear? In future, will much more explicit, complex, prescriptive rules be applied to banks through the regulator, as the hon. Member for Sevenoaks (Mr. Fallon) suggested, and will we have a much more regulated system? If the system were much more regulated, what would it mean for the concept of banking as we have traditionally known it? Banking would then become much more like supplying electricity and water; very tightly controlled conditions would apply. That raises the question of what the banking system is for—something that the right hon. Member for Holborn and St. Pancras (Frank Dobson) mentioned. It is fine to criticise the FSA and its failures of regulation, but I am still not clear what the implications of doing so are for the way in which the FSA operates in future.
	The second set of recommendations by the Select Committee, and probably the most important, relate to deposit protection. There is general agreement that there must be proper deposit protection, that the American model in general is the best available, that it must be, in practice, 100 per cent. protection up to a limited sum—£50,000 seems about right—and that that is the direction in which we will proceed. I have one worry about that, which was not dealt with by the Select Committee; that is, what happens to competing institutions, such as insurers, who do not have the same quality of compensation? They are competing with banks in many respects. There is the outstanding problem of Equitable Life, whose investors were just as exposed as investors in Northern Rock and who have not been compensated and presumably will not be. Why should one set of financial institutions have a fundamentally different type of compensation mechanism from others?

Greg Hands: The hon. Gentleman referred to the US style of deposit insurance enacted by the Federal Deposit Insurance Corporation, which was mentioned earlier. Is he aware that the system in the United States is not exactly parallel, and that in the States there are still more than 1,000 deposit-taking institutions? Some of those are very small, and the concept of deposit insurance may be far more relevant—for example, at the Montana state bank—than it would be at Lloyds in the UK. The hon. Gentleman is comparing apples and oranges. There is a case for deposit protection, but the US example is not quite all it is made out to be.

Vincent Cable: If the banking industry in this country develops in the way that it could develop and as some of us feel it ought to develop, which means becoming much more competitive and having a much wider range of deposit-taking institutions, the models would become closer and the analogy would be more directly applicable.

Greg Hands: In the States, the movement is more in the opposite direction. As banking consolidation happens in the States, more and more people are questioning the need for the FDIC to be there for very large institutions.

Vincent Cable: No doubt we could continue this conversation all afternoon. The one conclusion that we drew from the events of last year is that if there is no such structure, the old system of compensation was not adequate, partly because it did not cover 100 per cent. but more particularly because it was not timely—the payouts were not rapid enough. That is the lesson that was learned, and my understanding of it is that the American system is much better in that respect. Clearly, there are differences and we should be careful about blindly copying that system, but I am trying to make the more general point, reinforcing the views of the Select Committee.

John Redwood: If the problem of compensation can be resolved or the answer improved, one of the options to look at is what the Department of Trade and Industry, as it then was, used to do with insurance companies when it was the insurance regulator. If it felt that an insurance company was over-trading or not liquid enough, it would stop it writing all new business and put the company into run-off, which meant that the assets and the liabilities both had to be managed in the interests of all the counterparties to try and salvage as much as possible.

Vincent Cable: We are talking about slightly different things. Is not the purpose of deposit protection to prevent a panic run on the industry? That is what it is designed to achieve. The right hon. Gentleman is right in saying that if the institution itself gets into difficulties, there are various ways of handling it, including closure. I entirely understand his point.
	The third set of questions that arise from the conclusions of the Select Committee are about how banks should be regulated in the broadest sense of liquidity. There was an interesting passage in "The run on the Rock" which I had not understood previously, about what happened when the Northern Rock bank managers discovered that they had excess capital—that they had over-complied with the capital adequacy requirements. As I understand it, they simply blew it on a big payout to their shareholders.
	That raises the question what those capital adequacy ratios are for. Common sense suggests that in a boom period, as those bank managers were, with a massive expansion of lending and a booming housing market, the requirement should have been tightened rather than relaxed. Similarly, a period like the present, when the market is going down, should be the point at which it was relaxed. I ask, and I do not know the answer, whether it is possible to design a system that is counter-cyclical, and whether that is compatible with the rules of the European Union, under whose auspices these institutions now operate. That is the kind of mechanism we should consider.
	Albeit from different standpoints, the right hon. Member for Holborn and St. Pancras and the hon. Member for Sevenoaks have both asked what banks are for in the new world and what they should look like. Mr. Don Cruickshank raised those questions seven or eight years ago, when he pointed to the apparent anomaly that the industry is ultimately underwritten by the state but makes well above average profits in terms of the rate of return on its capital over a long period of time, which, from his point of view, is unacceptable.
	There are two ways to resolve that situation. The first is to treat the banks as utilities by making them highly regulated and highly controlled. That would directly or indirectly control their profits, which is what the right hon. Member for Holborn and St. Pancras wants. The alternative is to say that provided deposits are protected, the banks should compete and the industry should be treated like any other. I am more sympathetic to the latter approach, but getting there will be difficult. We need a clear understanding and commitment from the Government and the Financial Services Authority about which of those two models they are going for, because simply adding a new layer of regulation to the existing system will not help.

Frank Dobson: I understand the hon. Gentleman's point, but it assumes that if banks were allowed to go broke, subject to looking after the depositors, they would behave differently without further regulation of their activities. I am not confident that that is the case in view of the number of apparently reputable banks that have lost a fortune either directly or indirectly in the sub-prime mortgage scandal in the United States.

Vincent Cable: If some of the banks were to go bust, lessons would be learned. Historically, banks, like any other set of companies, have short memories, so the pattern returns after a generation. However, I take the right hon. Gentleman's point.

Charles Clarke: I am delighted to contribute to this discussion as the Member of Parliament for Norwich, South, where 25 per cent. of my constituents work in financial services. I must also point out that the headquarters of Virgin Money, which was directly involved, is in my constituency.
	I begin by paying tribute to the report, which is first class. In particular, I pay tribute to my right hon. Friend the Member for West Dunbartonshire (John McFall). The Committee has done an outstanding job on both the principal report and "Financial Stability and Transparency" by clarifying the issues, which will hopefully enable us to avoid problems in the future.
	The main reason why I want to contribute to the debate is to support the banking reforms proposed by the Select Committee in paragraphs 314 to 317, which deal with the role of the proposed deputy governor and head of financial stability. I support that role, which is the right way forward. Before I discuss those reforms, however, I want to discuss one or two other specific aspects of the report.
	On moral hazard, the report describes the controversy among senior people in the world of financial services about the extent to which moral hazard should or should not be taken into account and dealt with. I am nearer to the view expressed by the Governor of the Bank of England, even given all the proposals, that moral hazard is a real factor. That relates to our earlier debate about the responsibility of shareholders and of businesses for business practices. The right hon. Member for Holborn and St. Pancras (Frank Dobson) and the hon. Member for Twickenham (Dr. Cable) discussed the responsibility of considering mortgages in terms of the sub-prime issues. It would be a serious mistake to relax the regulatory obligation, and indeed the competitive obligation, on financial services businesses to be responsible in their practices, and we should have mechanisms to make that clear.
	As the report indicates, there are failings in the existing system. The responsibility of the institutions to their shareholders is not at all clearly set out, and many shareholders are simply ignorant of the business practices that were there. But fundamentally, despite the real sadness for many small shareholders who owned shares side by side with major hedge funds, the report's comments on financial stability and transparency indicate the range of issues and the importance of companies taking responsibility for their own acts.
	I accept the report's recommendations about the need to protect depositors better; a number of other contributors to this debate have referred to that. At the beginning of all this, there was insufficient clarity about the importance of protecting the depositor in contrast to the importance of the role of the shareholder. That is an important distinction that the report brings out well, but it was not brought out so well during the public debates at that time.
	That brings me to my second point, which is about the role and effectiveness of the Financial Services Authority. I do not have a great deal to add to what the Treasury Committee Chairman said, except to emphasise the point that it is the key role of the FSA to offer proper judgments in matters such as this, rather than simply going through process and procedure. The report mentions two aspects—that of the rapid expansion of the business and that of the declining share price of the company. They should have made the FSA judge more carefully what was happening in the organisation. The hon. Member for Twickenham referred to the quality of assets in relation to such issues. The FSA has learned lessons from this whole debacle, but the fact is that it should not have needed to learn them from a debacle. The lessons should have been learned before.
	Thirdly, I want to comment on what the report calls
	"the support operation and stopping the run"
	and on the ability to plan to deal with such crises. It is clear that the tripartite system did not work as it should have. Paragraph 280, on the overall operation of the tripartite system, and paragraph 289, which is about the communications system in particular, are powerful and, to an extent, damning. I hope that the Government will deal with them fully in their final response to the issues.
	Essentially, there is a serious criticism of the preparation and work that were done. I hope that the contrast that I draw will not seem too extreme: my experience as Home Secretary in the period of the 7/7 disaster—the explosions in central London. Whatever the causes and circumstances at that point, tremendous, fully prepared emergency service co-operation immediately came into operation, as I and the current Chancellor saw from close by. That co-operation involved the taking of responsibility and a clarity of command and control issues that was impressive to see.
	I shall give an illustration from the communications side. Some hon. Members may recall that early in the afternoon on that 7 July, there was a major press briefing in which all the services spoke together to the country. They said, "This is what we are doing and this is how we are dealing with the circumstances." The key point, shown so well when contrasted with the run on the bank, is that the people themselves were players in the events as they emerged. It is critical to communicate effectively with people. The report has drawn that point out well. As I said, there are serious points in paragraphs 280 and 289. It is important that the Government give a lot of attention to those in their response; I am, by the way, absolutely sure that they will.
	My fourth and main point is about the section of the report entitled "Dealing with failing banks", which addresses some of the criticisms made by the hon. Member for Twickenham. The section says that the FSA has to find a way of dealing with issues of the type that we are discussing and change its practices and procedures. The section tries to address those issues. It makes a whole string of proposals in respect of an improved legal framework and procedures. I broadly support those, and the Government have already constructively responded to them to try to find the right solution to the problems.
	The section also deals with the question of the European Union market abuses directive, which I found confusing at the beginning when evidence was given to the Committee but which is now fully explained in its report. I want to add the rider that in the modern era it is almost impossible to try to run covert operations in relation to this area. One can see why that was how it worked as recently as 20 or 30 years ago, with the tradition of the Governor of the Bank summoning all the players into a quiet room somewhere in the square mile and saying, "We're going to sort it out like this, this and this." However, predicating a system on the operation of such a covert system is very difficult to achieve, irrespective of the detailed formulation in the market abuses directive or in other legislation, and the Committee was right to acknowledge that.
	I particularly want to reiterate the point made by the Chairman of the Select Committee when he called for leadership in these matters. If the command and control systems are to be got right as between the various aspects of the tripartite system, if the preparations are to be got right, and if there is to be an authority that means that financial institutions, Government agencies and so on will operate in a co-ordinated way, that requires leadership and authority that people accept, and no ambiguity of any kind about where the buck stops in such a situation. That is why the Treasury Committee is right to recommend, as it does in paragraphs 314 to 317, the establishment of a new post of deputy governor and head of financial stability.
	There can be arguments about how that is carried through in detail, what is precisely the right way to do it, and whether the Committee has got it right in every aspect of those paragraphs; I do not commit myself to the specific detail on each point. However, there should not be argument about the need for an individual who is responsible for taking decisions in this field—someone who is publicly known to be responsible and to whom people, including the Chancellor and Prime Minister, will naturally turn for advice in these situations.
	I mean no disrespect to the FSA in saying that I fear that if the FSA is chosen as that vehicle, the individual concerned will not have the authority that would go with the role of a deputy governor of the Bank of England. I know that it is a difficult question and that there are plenty of arguments to the opposite effect. However—I have talked to the Chairman of the Select Committee about this—the reason why I was keen to speak in this debate was that I wanted to lend my support to the Committee's proposals. In such circumstances, when we are dealing with potential crises that can be deeply destructive of this country's economy and political structure, we need clarity, and that is what it recommends.
	On the overall position, although I was personally extremely sceptical about the possibility of a private sector solution to these events as they emerged, I am sure that it was right to look, even briefly, such solutions. Nevertheless, I have been of the view from the very beginning that public ownership and rundown was the best strategy, and I am concerned that leaving the key question—"rundown or going concern?"—as an open matter will make it more difficult to resolve the situation than in other circumstances. The principle of a level playing field for all financial services institutions guarded by the institutions of the state, the law, EU law and so on is very important for all the people who have investments in a wide range of financial services institutions. There must be no question of one particular financial services institution being picked out for public sector support in contrast to others. That is a controversial point, but I think that it is what will, and should, ultimately emerge out of this state of affairs, and it is where we need to go in future.
	I look forward to the Government's response to this excellent report. I hope that the Select Committee will continue to give attention to these matters and will consider one or two of the questions raised earlier in the debate.

Mark Field: This has been a very interesting debate. My hon. Friend the Member for Sevenoaks (Mr. Fallon) was absolutely right to identify the need to avoid at all costs the knee-jerk reaction of rapid regulation that might unravel and be regretted in future. That was implicit in the Treasury Committee's report.
	The right hon. Member for Norwich, South (Mr. Clarke) made a very interesting contribution, drawing a parallel with the events of 7/7, when he was Home Secretary. It would be difficult to have the clear command structure among people in financial services that there was for the armed and emergency services on that day. It is a little idealistic to assume that we could put such a structure into place, however it worked. The Select Committee and the Treasury will continue to debate the issue.
	There have been more spectacular banking crises than the one that affected Northern Rock in recent months. The phenomenon of a run on a bank was, after all, almost commonplace in Victorian times. More recently, the collapses of Bank of Credit and Commerce International in 1991, and of Barings only 13 years ago, show that even a highly regulated banking sector is never immune to mismanagement or to fraudulent activity. The fiasco of Northern Rock is a modern-day, sorry catalogue of poor judgment and woeful indecision.
	I agree with relatively little of what the right hon. Member for Holborn and St. Pancras (Frank Dobson) said about the City, but some elements of his comments were right. Certain enormous incentives for the banking industry have allowed some of the problems that have emerged in the credit crisis to come into play. It is not for the Government to regulate on the matter entirely, and the right hon. Gentleman recognised that implicitly, but some perverse incentives in the banking industry have contributed in bringing us to this pass.
	Some have been keen to point the finger of blame entirely at the actions—or inactions—of the Treasury and especially at the erstwhile Chancellor of the Exchequer. In truth, responsibility for what happened at Northern Rock should be more widely spread. First and foremost—it was absolutely right that the right hon. Member for West Dunbartonshire (John McFall) referred to this—the senior management of the Bank, in particular its former chief executive, and the array of non-executive directors bear some responsibility. Collectively, they should have realised that the aggressive growth in Northern Rock's turnover strategy depended on continued economic blue skies and liquidity in the money markets. Northern Rock's strategy was so diametrically opposed to those of its competitors that alarm bells should have been ringing about its sustainability among the well-remunerated non-executives—a roster that included some well-known City names.
	Once the credit crunch hit in early August, the Bank of England should have been far more fleet of foot. Reference has been made to the role of the Financial Services Authority, but I believe that the Bank of England was at fault to a certain extent, particularly with regard to its amenability or otherwise to Lloyds TSB's proposal to take over Northern Rock before the public became aware of the nature of the crisis. That would, no doubt, have required substantial Treasury guarantees, but UK taxpayers would almost certainly have been in a more favourable position than the one in which they find themselves now, several months on.
	One of the biggest, longer term casualties of the whole affair will be the Governor of the Bank of England, who has played an important part in overseeing this debacle. His credibility in the City has been severely damaged, and it is difficult to see how he would be the right man to lead any restructuring of the Bank of England, which is my party's preferred approach.
	This episode, coupled with the rapid internationalisation of the ownership of financial institutions in the City, puts into perspective some of the harking back to the pre-1997 arrangements. The City is a club no more and the Bank of England's role as judge and jury is probably best confined to the past. Meanwhile, as a number of hon. Members have pointed out, the Financial Services Authority lacks clout and respect among leading City institutions, meaning that banking reform should be informed by 21st century requirements, rather than by a return to some bygone era.
	We must remember, however, that the difficulties for Northern Rock did not start last September—they only became public in that month. Once the crisis was out in the open, queues began to develop outside branches of the bank. At that stage, the possibility of an autumn general election, and the fact that the bank was a large, almost iconic employer in Labour's north-eastern heartlands, resulted in a catalogue of ill-advised Treasury decisions. To a large extent, this crisis was driven by political considerations, which has not been helpful. I accept that simply allowing Northern Rock to collapse was never an option. As the right hon. Member for West Dunbartonshire said, banks are different from other companies in that they have depositors as well as shareholders. Although the value of a shareholder's investment can, in principle, be allowed to diminish to zero, the entire competence of the banking system depends on banks' depositors being assured that they will be compensated—in my view, fully—in the event of a collapse.

Jane Kennedy: I know that the hon. Gentleman genuinely and firmly holds his view about politically inspired decisions. I would like to understand his point, which I do not think that he makes flippantly, but it would be interesting to know which decisions he thought were wrong and politically inspired.

Frank Dobson: And whether they were supported by the Tory party.  [Laughter.]

Madam Deputy Speaker: Order.

Mark Field: I shall try to make this a solo rather than a duet.
	It is fair to say that, when the crisis emerged—I admit that it informed some Conservative policies, too—we were in the cauldron of a likely pre-election campaign. Consequently, we went down another path when we might have moved more quickly to nationalisation, which, many people realised by November and December, was definitely on the cards. I have some sympathy for the Government's position. They wanted to look for a private sector buyer and perhaps they looked for too long. There was also an implicit recognition that, when we had come to such a pass, things would not get better and were, indeed, likely to get worse. However, in those few weeks in September, decisions were driven by a political agenda. I am not necessarily being naive; a political agenda has its part to play at any time, but let us bear in mind the potential imminence of an election and the fact that the building society had great strength and roots in the north-east of England—perhaps if it had been in the south-east of England, there might have been less of a rush towards Government activity.

George Mudie: Is not that a bit unfair? The institution was not simply a northern bank but a bank with queues outside the door, and there was a genuine fear that other badly placed banks would be caught up in the contagion. That made the Government take action. The decision was nothing to do with northern heartlands; systemic risk brought it about.

Mark Field: There is some fairness in that, and I discussed systemic risk earlier. The agenda of a 24/7 media makes things difficult. The media got hold of the problem with floods not when they occurred in Hull and Sheffield but when they affected holiday homes in the Cotswolds. Suddenly, floods were a massive national issue in a way they might not have been previously. That reflects the media timetable.

Adrian Bailey: What decisions by the FSA, the Treasury or the Bank of England were influenced by political considerations?

Mark Field: The hon. Member for West Bromwich, West (Mr. Bailey) must be proud of his football team's success at the weekend, although there is a heavy match against Portsmouth in the FA cup semi-final to come.  [Interruption.] I am trying to show that I have some knowledge of culture, media and sport, if not necessarily of Treasury affairs. However, I have tried to make the point that there was feverish activity in September and October, when, without the perceived imminence of a general election, more long-term decision making might have occurred.

Philip Dunne: I am grateful to my hon. Friend for allowing me to offer him a suggestion. The decision not to advance a lender of last resort facility to the one credible private sector bidder that made overtures about acquiring the bank in August and up to the first week of September could be described as a political decision by the Chancellor.

Mark Field: That is fair to say about one of the Chancellor's many minor decisions.
	The "temporary" nationalisation of Northern Rock has been forced on the Government as an implicit recognition that, economically, things are likely to get worse in this country before they get better. No one should assume that uncertainty in the financial markets is a short-term phenomenon. Speaking to people in the City, I have detected that whereas confidence was renewed in January and early February, there has been a recent slump in confidence, although I appreciate that much of that can ebb and flow. However, there is little doubt that it will take less than five years at the absolute minimum for taxpayers to extricate themselves from Northern Rock without net losses.
	The Government should be resolute in resisting the claims of shareholders for compensation. That applies particularly to the hedge funds that piled into Northern Rock stock in the autumn hoping for quick speculative returns. They gambled and they lost. Regrettably, however, we cannot draw distinctions among the different classes of shareholder, however much we might wish to protect the interests of small, loyal Northern Rock investors or former employees and suppliers who may have held stock for some years. No more taxpayers' money should be expended on bailing out Northern Rock shareholders, beyond that which will be determined by arbitration.
	Hon. Members in all parts of the House in the months to come will doubtlessly be inundated by pleading on behalf of well orchestrated, high profile shareholder groups, as they battle, perhaps even in the courts, for compensation. The temptation to make common cause with such groups should be resisted. We now need to give the new chief executive, Ron Sandler, the breathing space to make plans for the future that are economically viable, rather than simply politically expedient. The likeliest and wisest way to proceed involves the parcelling and sale of parts of the Northern Rock business, as market conditions allow in the months and, potentially, years ahead.
	There is no easy fix. Politicians need to appreciate that if taxpayers are to stand a realistic chance of recapturing their guarantees and loans in full, we almost certainly face a long haul.

Adrian Bailey: I, too, congratulate the Treasury Committee on its work—as I am not a member of the Committee, perhaps I am better placed to do so. It produced a comprehensive report on a detailed and arcane subject, which was not made easier by the fact that the issues were unfolding as it did its work. The nature of the Committee's conclusions does it great credit.
	Before coming to the substance of my remarks, I should like to declare an interest. I am chair of the all-party group on building societies and financial mutuals and make my comments as a committed supporter of the building society and mutual sector. However, although I am predisposed towards the sector, I recognise that companies in the financial services market are extremely important and that they complement the building society sector. It is in the interests of the consumer that the public have confidence in both sectors.
	In 2005 and 2006, the all-party group conducted an investigation into the consequences of demutualisation for building societies, in a report called "Windfalls or Shortfalls?" The purpose of our investigation was to find out exactly what benefits, if any, had arisen from demutualising and who had enjoyed them. I will not go into the full range of our conclusions, except to say that the advantages that building societies enjoyed in not having to pay dividends to their shareholders was passed on to the consumer, hence building societies tend to dominate in the best value tables.
	Interestingly, the one company that stood alone and bucked the situation was Northern Rock. In its evidence to the Committee—it did not give verbal evidence, but it sent a letter—its deputy chief executive, David Baker, said:
	"Since 2000 we have been able to tap into Residential Mortgage Backed Securitisation markets to fund a growing proportion of our lending."
	He gave a figure of about 37 per cent. by 2004. He continued:
	"These funds have been raised increasingly abroad in Europe, USA and more recently in the Far East. Our wholesale funding had followed a similar trend and about 75 per cent. of all our new funding is now raised abroad."
	He went on to say, most conclusively:
	"We do not believe this would have been possible had we been a mutual building society."
	In view of the consequences of the model outlined by David Baker, I am sure that investors in building societies throughout the country will be profoundly relieved by that statement, and I emphasise it because it is of particular importance that there are regulatory obstacles to building societies funding a proportion of their lending through the wholesale market. That has provided a protection and security to building societies that has not been so evident in the banking sector.

Mark Hoban: Does the hon. Gentleman not remember a Bill that received Royal Assent last year at the behest of building societies to increase the proportion of funding that they could get from wholesale markets?

Adrian Bailey: I well remember the Bill; indeed, it was proposed by an Opposition Member, and I supported it in the Chamber. The Bill allowed greater flexibility to be exercised, but it also introduced an FSA regulatory process for wholesale lending to building societies, and it was never envisaged that that would reach the 75 per cent. proportion that was evident in Northern Rock. Whereas the situation is more relaxed for building societies than it was before that legislation, regulatory restrictions still apply to the amount that building societies can borrow from the wholesale market.
	Northern Rock—its staff almost boasted of this—had "an extreme business model", to use the FSA's phrase. As I have said, it was disproportionately wholesale-funded. There was an absence of suitable insurance, and there was no plan B—no stand-by facility, whereby alternatives could be found if the existing sources of funding dried up. Ultimately, the blame for that must lie with the directors—the chairman, the chief executive and the non-executive directors—because they alone had devised that model, and in doing so they knew that they could aggressively seek new mortgages. The hon. Member for Twickenham (Dr. Cable) outlined some of the mortgages that they boasted of securing. Again, they boasted about them in the evidence that they gave to the building societies group. The fact is that they were using a model to borrow money to lend aggressively in mortgage packages that were somewhat doubtful and the sources of which were very vulnerable.
	I mention that in particular because we have all been subject to shareholder pressure to get Government compensation. Indeed, one of the issues that must be examined is that of the Bank of England's moral certainty and the belief that it should provide liquidity to underwrite bad business practices—or not. It seems to me that the fundamental stance of the shareholders is basically that it should, but the Bank of England took a hard-line position and it did not. My right hon. Friend the Member for Norwich, South (Mr. Clarke) supported that, as the issue of moral hazard is obviously crucial in the robustness of the banks' business models.
	Similarly, the Financial Services Authority has attracted criticism because although it recognised that the business model was extreme and inappropriate, it did not challenge Northern Rock either to change it or to provide an alternative source of funding, should things go wrong. Those areas of concern must be taken up in any Government inquiry in order to understand what regulation, if any, is appropriate to change that approach. Ultimately, when it comes to compensation and the role of the shareholder, it must be that the balance of culpability for this fiasco has to lie with the directors and the company. The public cannot be expected to underwrite either through the Bank of England or as taxpayers the business decisions of a board of directors.
	What should be done? With a spectacular failure such as this one, there is a danger of issuing emergency regulations that are just window dressing and provide no substitute for dealing directly with the actual problem. The hon. Member for Cities of London and Westminster (Mr. Field) might not have said that the whole thing was political, but he did emphasise the role of political decisions. However, neither his answer to my intervention nor the intervention of the hon. Member for Ludlow (Mr. Dunne) provided a very convincing basis for making that allegation. In respect of the comments of the hon. Member for Cities of London and Westminster about the local football team, I should make it clear, speaking as a resident of West Bromwich, that I am a Cheltenham Town supporter—and my team was considerably less successful on Saturday!
	We need to ask whether the existing regulatory framework is sufficient and whether the problem was simply the result of its not being properly applied. I think that there is considerable evidence to demonstrate that most of the regulatory framework was actually in place and, had it been properly applied, it might have prevented the problem. Comments were made earlier about the small number of FSA staff who were charged with dealing with Northern Rock. I note that it states in this morning's  The Times that five FSA members have resigned. It seems that there is a problem with staff turnover. How far that contributed to the lack of adequate monitoring and supervision of Northern Rock, I am not in a position to say, but it is obviously an issue that must be addressed. There is little point in implementing a whole set of new regulations if those fundamental problems are not dealt with at the same time.
	The second question is about the Bank of England and the balance of responsibility on the moral hazard. The refusal to provide the necessary liquidity in the market is said to have contributed to the problems, but the Bank's overall responsibility for the preservation of the robustness of the banking system has also been emphasised. I believe that there is a debate to be had about that.

George Mudie: Will my hon. Friend comment on the Bank of England's behaviour in finding what every hon. Member in the Chamber thinks was the best solution—a market solution? Is there evidence of the Governor or any staff member of the Bank of England speaking to either of the two private sector firms that showed an interest in August, before the September collapse? Why is the FSA hit by such savage criticism when that sort of behaviour goes unnoticed and unquestioned?

Adrian Bailey: My hon. Friend asks an interesting question. My understanding, bearing in mind that I was not on the Treasury Committee, is that there was conflicting evidence on that and that the Committee could not come to a hard conclusion. If the Committee, having asked people the questions, could not come to a hard conclusion, I hope that he will forgive me if I duck the issue. I do not know the answer to his question, but the subject is perhaps worthy of further investigation.
	The Committee went on to propose a range of other potential regulations or policies that would help to prevent such an event from happening in the future. They include deposit protection, pre-funding and insolvency procedures. Those need to be examined closely and the industry needs to be consulted. I am a little concerned, however, that much of the source of inspiration for those—the hon. Member for Hammersmith and Fulham (Mr. Hands) raised this issue—is the American model.
	I was given to understand that about 10,000 financial institutions carry out banking functions in America, many of which are much smaller than institutions in this country. As a result, insolvencies are much more common and a process for dealing with those has been developed. It could well be that good, hard lessons can be learned from the procedures implemented there, but I would be a little wary of assuming that we can necessarily graft on to our own body of regulation regulations that are derived from a totally different financial services market, which has a far greater number of players and many more smaller players. I mention that as a cautionary note.
	I underline and support comments about a communications strategy. They were well made. In today's communications world, with 24-hour coverage, intense speculation about the smallest announcement, moves or sub-text within a balance sheet means that a coherent position has to be taken by the tripartite authorities when a problem is obviously arising. That is one of the problems that arose between 10 and 17 September last year. As a result of not getting a coherent message, media speculation was rife. That reinforced the natural sense of concern and worry of the depositors in Northern Rock and was a contributing factor to the queues that lined up outside that bank. There may well be a need for new regulation. However, that regulation must be proportionate and focused on the institutions where it is relevant.
	To return to my comments on building societies, I would not wish a body of regulation designed to deal with possible problems from a Northern Rock-style financial model to be imposed on building societies, which are based on a totally different model. The danger is that a new regulatory framework could be introduced that might be relevant to current circumstances but could prove a big problem for perfectly sound, well-run companies that have delivered value for money for, in some cases, hundreds of years
	In what will be a tighter and an illiquid mortgage market, we shall need to find whatever means we can of assisting the first-time buyer. If we introduced a set of regulations that might involve making the liquidity position of a range of financial institutions considerably more difficult than it is already, we could be working against our wider social objectives. There is a balance to be struck. I hope that the Government's consultation exercise will be deep and probing, and that the outcomes will reflect that balance. I hope that they will secure changes in regulation that are proportionate to the problem highlighted by Northern Rock without in any way damaging the wider financial services sector, particularly the building societies sector.

Peter Lilley: I pay tribute to the hon. Member for West Bromwich, West (Mr. Bailey). He made a powerful point, to which the Government would do well to listen, about the dangers of producing a system of regulation that might have prevented the problem we have just experienced, but would create new problems for very different sorts of building societies. I also pay tribute to the Treasury Committee and its Chairman, the right hon. Member for West Dunbartonshire (John McFall), for the valuable report that provides the substance for today's debate. It is slightly surprising, however, that it is the only substance for the debate.
	Last time we debated Northern Rock we rushed through legislation, having been told that it was essential to set aside the normal process of parliamentary scrutiny so that steps could be taken rapidly by the new management at Northern Rock which would bring about a new situation. We expected those steps to be taken rapidly, and we expected some illumination to follow, although we were not given it at the time of the nationalisation debate. We expected to know more about the competition rules and regulations, and the approach that we would have to adopt. None of that has happened. We could have had proper parliamentary scrutiny at the time, but we were denied it, not because of the needs of the business but because of the desire of the Government to escape the embarrassment of prolonged debate.
	I do not intend to pursue that point, however. Instead, I want to examine some of the factors underlying the problem of Northern Rock and the problems of the banking system, both nationally and internationally. Let me begin by mentioning a mistake which is so basic that no one in the Chamber has made or would make it, but which was commonly made by many commentators at the time when Northern Rock's problems were exposed. They said "The problem is that Northern Rock has been borrowing short and lending long." Well, of course it had: that is what banks do. If it had not borrowed short and lent long, it would not have been a bank.
	It is intrinsic to the nature of fractional reserve banking that banks borrow short and lend long. Banks tell depositors that they can have their money back on demand or at very short notice, but in practice only a fraction of the people who deposit money at any one moment want it back, so the banks need keep only a fraction of the money liquid and in reserve. In normal circumstances, they will be able to invest long-term in less liquid assets. That is the nature of fractional reserve banking, but it is also why fractional reserve banking systems, although stable in normal circumstances, are potentially and intrinsically unstable.
	If everybody decides they want to remove their money—as they have the right to do, and as the banks have promised them they can—they cannot do so because the banks only have a fraction of the money on reserve. We can draw an analogy with bridges: if people walk over a bridge in the usual random fashion it might carry 1,000 people, but if all those people march over it in step, it will collapse. The banking system can operate if some people are putting money in and others are taking money out, but if they all decide to take money out, it collapses, as we discovered when people formed queues outside Northern Rock branches.
	It follows that there are only two possible approaches. One is the extreme but rigorous intellectual one proposed by people such as Murray Rothbard, which I do not think has many supporters in this House—apart, possibly, from the right hon. Member for Holborn and St. Pancras (Frank Dobson)—which asserts that fractional reserve banking is intrinsically fraudulent and that it should not be allowed or sustained. As a result, banks would find that they had to keep 100 per cent. of their assets in liquid reserves and would cease to be fractional reserve banks. I would not propose that view, but if we do not accept it, we must instead have a lender of last resort who is prepared to step in and prevent a bank from failing if there is the remotest chance of that bank failure spreading to other banks and causing people to want to withdraw their money simultaneously—to march in step rather than put money in and take it out in the usual random fashion—and that must be accompanied by deposit insurance. I think that the Bank of England might momentarily have forgotten that intrinsically it has to operate as a lender of last resort, and have thought instead that moral hazard overrode that position so it had to let Northern Rock go belly up. That cannot be allowed to happen; the lender of last resort is so important that it must at times override the concerns about moral hazard to protect depositors and to prevent the contagion of other banks—but not, of course, to protect the shareholders. There is no obligation on the Government or central bank to prop up the value of shares; people have put their equity at risk, and they know that they can lose it—and, as we are aware, there are, of course, equity risks in other areas.
	Although we must accept this fundamental nature of the banking system, while we are looking afresh at our banking and mortgage finance systems, we might also look at the experience of other countries. The right hon. Member for Holborn and St. Pancras mentioned a point that I have previously made: the Spaniards have demonstrated that if banks are required to consolidate all their loans and operations, which we elsewhere have allowed them to take off balance sheet, they are less likely to go down the road that has led to the sub-prime crisis in most other countries. We might also look at what happens in Switzerland, Hungary and some other countries where mortgage loans are generally required to match more closely the term of deposits and bonds. That may result in slightly more expensive mortgages over their life, if short-term interest rates are on average a bit lower than long-term interest rates, but it produces a more stable system. There is a case for examining more closely what happens in countries that require that and which do not seem to have had these problems. They also do not seem to have had as much housing market inflation as our system has had.
	The second fallacy that is frequently uttered in the public discussion of these issues is the suggestion that the credit crisis that we have experienced worldwide is caused by banks becoming more imprudent. If anything, the reverse is the case. The credit crisis has revealed the problem of imprudence at certain banks in certain cases, but it has not been caused by that. When the tide goes out we see who was swimming naked—we learn who forgot to put on their bathing trunks. The fact that they did not put on their bathing trunks did not cause the tide to go out. When the credit tide ebbed, we discovered which banks' lending had been less prudent than others, but that less prudent lending did not necessarily cause the tide to ebb.
	A third frequently made statement is that the problem was that banks chose to invest in risky assets when they should have put their money into safe assets. By and large, banks would have preferred to put their money into safe assets; they put their money into risky assets only because there were not enough safe assets with notable returns. Why were they being led in that direction? Why did they spontaneously and across the world start investing in more risky assets?

George Mudie: Greed.

Peter Lilley: No, it was not because of greed. It was because it was necessary that they be encouraged to do so. There is a systemic imbalance in the world economy. In China, above all, and in a number of other countries, the willingness to save and lend far exceeds the willingness to borrow and invest—it is extraordinary in such a poor country. That surplus of savings requires the rest of world, if there is not to be a deflation, to borrow more and save less than they would otherwise do in order to match that imbalance. That is what has happened: an outflow of savings from China has financed a huge deficit in the United States and other developed countries. That is the precise reverse of what one might expect to happen between rich and poor countries.

Sally Keeble: I have listened carefully to the right hon. Gentleman's interesting speech. Does he accept that a number of banks will say that they did not think they were investing in risky products because they were all given good ratings by the ratings agencies and that the products' weaknesses emerged only afterwards, when it was, by and large, too late for the banks then to do anything about those products—or rather when the banks would say it was too late?

Peter Lilley: The hon. Lady perceptively raises an issue that I am about to discuss. If she does not mind, I shall try to reach it by my own process, but as she realises, it is fundamental.
	The imbalance of savings in China and elsewhere means that the rest of the world has to borrow and spend more, and it is encouraged to do so by decreasing interest rates. The reduction in interest rates means that people have to look around for things in which to invest all that cheap money, and there just are not enough high-yielding assets and opportunities in America, this country and other developed countries. Of course people look for the safest options and the best and most reliable yields, but they are being encouraged in this process.
	If people had not spent and borrowed all that money, there would have been a deflationary tendency in the world economy, so let us not assume that there was an easy option—that they should just not have done it and they should have let the money pile up in their coffers. We would then have been complaining about the lack of spending, investment and borrowing to counteract the excessive piling up of savings in China and elsewhere.
	Banks try to ensure that they have good collateral in circumstances in which yields are low; I come to the point that the hon. Lady was making. They think that bricks and mortar are safe, sound and robust. Bricks and mortar—buildings—may be solid, but the value of those assets is in itself a financial phenomenon, and it is partly driven by the weight of lending and borrowing that is taking place. People borrow money on the value of houses and that money then goes around the system, driving up the price of houses. When there is any check on that system, we suddenly find that the whole process is vulnerable, because the asset base used as collateral behind the loans that people have been encouraged to make starts to fall. That is what happened. The value of housing in the States fell, so the loans were not covered, and when people lost their jobs the mortgage institutions called in the loans and found that the value of the housing was not sufficient to cover them. That inherent instability means that when the whole party stops—when the spending stops driving up the value of the assets used as collateral to justify the loans—we find ourselves in a brittle situation.
	I do not have a solution, but no one should pretend that the solution will be fiddling around with regulation. We will probably go through a difficult period; we may go through another cycle whereby the whole banking system is re-liquified by the central banks, and everyone thinks that that is jolly good and starts lending again. Unless and until the underlying problem of China's saving too much and America's running huge deficits is solved, we will be in an intrinsically unstable situation.
	In the long run, we must move towards a situation where China uses its money to enrich its own people and America learns to balance its books and balance its own savings and investments rather than be the lucky recipient of poor countries' money. Although the issues that I put before the House go far wider than the report, I hope that they will illuminate the further thought of hon. Members and the Committee on this subject and that the Government will take them into account when they think ahead, rather than imagine that a sophisticated system of regulation will solve the intrinsic problems of either the banking system or the world economy.

George Mudie: I, too, congratulate both the Chair and the members of the Treasury Committee. We know that my right hon. Friend the Member for West Dunbartonshire (John McFall) works us hard and works himself far too hard. He has steered us through, and achieved a consensus on, a very controversial matter, which is no mean achievement.
	I also congratulate the Committee's staff, about whom I would like to speak to the Deputy Speaker and the House authorities through this debate, if I may. The hon. Member for Twickenham (Dr. Cable) was a bit grudging about the Treasury Committee reports, but they would be even better if we had more staff. I am amazed at the quality of the reports and the amount of work that the Committee does with such a small number of dedicated staff, and I fear that we exploit their dedication. I think that view is shared by others. The Treasury Committee—this probably applies to Select Committees as a whole—is a very useful institution and a very valuable instrument, certainly in this place, where it is the Cabinet or nothing and where no debate and no policy examination is encouraged. I am not making a point about our Government, because this applies to every Government, but I almost think that the Select Committees are deliberately understaffed and under-resourced—and that applies to the Treasury Committee in particular.
	The hon. Member for Twickenham was grudging, but probably right, about the report. The questions he asked were accurate, but I would advise his two colleagues sitting opposite me to have a quiet word with him. It would be wonderful if someone ever volunteered information to the Committee. I remember once asking bank representatives how much they made out of credit cards and their response was, "We don't tell the shareholders, so we're not telling you." Even in respect of this exercise, I can remember an infamous occasion when I was more than bad tempered with a Governor of the Bank of England.

John McFall: Remarks such as that from the credit card companies can be dangerous. They had come before us to discuss unfair penalty charges that they had imposed. We said, "The charges you imposed are all rounded up to the nearest pound. How much do you make out of that?" They replied, "We don't make anything out of it." They did not tell us anything, so we referred the matter to the Competition Commission. It is now with the Office of Fair Trading and in the courts, so they got themselves into trouble because of their truculence and stupidity. Does my hon. Friend agree that if they were a wee bit more open with us, that would help both them and the country?

George Mudie: I totally agree. I thought that my right hon. Friend was intervening to say that I was never bad tempered with anyone, let alone the Governor of the Bank of England. I am deeply disappointed that he did not.  [ Laughter. ]
	The real value of the Committee in the exercise came about because, as it happened, we had fixed a meeting with the authorities in September on another matter—I think it was to be with the Governor on a monthly inflation report. When the Northern Rock situation blew up, we were able to take the opportunity to raise the matter. We performed a valuable service because when three bodies are involved—in this case, the Government, the Financial Services Authority and the Bank of England—there is a tendency for them to fall out and for mistakes to be made. There is also a tendency for bureaucracy to win. Each understands that if there is a falling out and it speaks openly about what has happened, the other two will talk about what it has done. They conclude that the less they say, the better. In this case, we hit them hard, which meant that more information was put into the public arena than would normally be the case. However, the situation also underscored the problem that Select Committees have in getting people to volunteer information.
	My right hon. Friend the Member for Holborn and St. Pancras (Frank Dobson) made what I would describe as a lovely old Labour speech of a kind heard too rarely in the Chamber now. He put the debate in a wider perspective, which is what it needs. We are facing a threat to the economy and to people's standard of living and jobs, but not because of Northern Rock. It is interesting to see how many northern MPs are in the Chamber. The matter is now rarely mentioned in the papers, whereas until two or three weeks ago it was the staple diet of the financial pages. Northern Rock has been dealt with and dissected, but it is not the real problem.
	I do not wish to cross swords with such an experienced and able member of the Opposition as the right hon. Member for Hitchin and Harpenden (Mr. Lilley), but although we reached consensus in the Committee and produced a unanimous report, varying shades of opinion fed into that consensus. On reflection, I think that Northern Rock had a very hard time. Some people would say it deserved that, but it was not the culprit and the cause of all our concerns. Those concerns were caused by the bankers and the banking industry that started the securitisation. We need responsible lending.
	There was a lass in America—I think she was 85 or 92—who was sold a mortgage of $450,000. After a year, when she packed up her cleaning job, she defaulted. It did not need an experienced banker to know that there was no way she would repay the money, but still it was lent. The lender did that deliberately, and the debt was passed on and contributed to the contamination of the wholesale markets that paralyses them to this day.
	I have had the deepest respect for the right hon. Gentleman for all the years I have been here—he handled the Maxwell crisis in an unparalleled manner. However, the behaviour in the Northern Rock affair was not new for the banks. I commend to him a book called "A Random Walk Down Wall Street".

Peter Lilley: indicated assent.

George Mudie: I see that he knows it. The updated edition has a wonderful long chapter on banking difficulties. Taking securities and selling them on is not new behaviour. Often in their history, banks have found something that will make them a lot of money, which some poor sucker will buy on the basis that they can sell it on to another poor sucker. That is the way they do things. The problem is not about China, Africa or India. It is about high yields, as the right hon. Gentleman said, and nothing more. The Chancellor said that he wished we could have some "old-fashioned banking" that was sensible and tight. Such banking is epitomised by the hon. Member for South-East Cornwall (Mr. Breed), who is glaring at me—no, he is smiling at me. It involved bankers who cared about their customers and were happy with a steady profit, but that is not what the national bankers are like.
	I wonder whether hon. Members remember the tulip bubble in Holland. A particular tulip became very valuable. The price went up and up until the last sucker said, "But this is not worth much." The reply was: "No, but you've bought it." By then, the rest were out of the market. "A Random Walk Down Wall Street" mentions all kinds of exercises like that.
	Layman though I am on banking, I remember when all our banks were investing in south America. I was the leader of the council up in Leeds at the time, and I was trying to get some of the brass to come to Leeds and invest there. They would have got good yields, but modest ones compared with what they were being offered in south America. Of course, when the south Americans got all their brass, they said, "Bye-bye, we're defaulting."
	I remember the high-tech bubble. People put their money in high tech, and why? Because of the yields. It was about greed. They did not question, they just bought, because they could sell at a great price. That attitude is what we are up against. If the Northern Rock situation has done anything for us, it should have allowed us to look past Northern Rock to what bankers are doing.

John Thurso: rose—

George Mudie: I welcome the hon. Gentleman intervening, because I need to work out where I am in my speech.

John Thurso: It is always a pleasure to help out the hon. Gentleman. Does he agree that his catalogue of historical tales shows that, in the City, it is always far better to be wrong in a herd than ever to risk being right on one's own?

George Mudie: As always, the articulate hon. Gentleman is spot on. He is a valuable member of the Treasury Committee.
	If I wanted to be controversial, I would say that one point of consensus in which I do not share is the heaping of blame on the FSA. Yes, it was lax in its regulation, as is spelled out in the report, but I do not like the way in which the other culprit, the Bank of England, has stolen off the stage without anything being said. It has a lot to answer for.
	In an intervention, I asked my hon. Friend the Member for West Bromwich, West (Mr. Bailey) about the market solution that we all wanted. Why was it not pursued? We have had no answer. Why is there no evidence that anybody from the Bank of England met the prospective buyers, one of which is now known to have been Lloyds TSB? We have had no answer. Why did the Governor dismiss that point in this fashion: "Oh, I vaguely remember a telephone call that came through to my officials from the FSA"? At such a time, I would have thought that Eddie George would have had that bank in on the Sunday and closed the doors, and they would have gone out at the end of the day with a deal done on a market solution. But that is a judgment call, is it not? I do not think that Eddie George should have dismissed the situation by not taking a telephone call, by not speaking to those involved and by not bringing in people from the City; he should have been straining every sinew to get a market solution. Clearly, however, the Bank of England did not do that.

Philip Dunne: I think that the hon. Gentleman is at the crux of what started to go wrong with this chapter of errors. To what does he attribute the failure to engage with the single bona fide credible private sector buyer? Once that buyer's initial interest had gone away, the Government were left with buyers of straw.

George Mudie: That is an interesting question. It was remiss of me not to mention the hon. Gentleman, as he raised the matter in a question earlier today.
	Members of the Committee might disagree with me, and it might be too cynical, but my point is worth making. It might be the wrong answer, but like the hon. Gentleman I would welcome another answer. The big question is: what on earth happened? Why were no efforts made to bring other banks in? Why, when the Government had a buyer, were the discussions not exhausted? Why was there no record of the negotiations? Those are good questions, are they not?
	Before I leave the subject of the bank, another question arises on the subject of moral hazard, and leads to that of regulation. Moral hazard has a place in a philosophical discussion. It also has a place in the wider picture, but I prefer what Greenspan said. He said that he saw it as his job not to burst the bubble—although there are questions about that—but to help pick up the pieces. We were in a difficult situation: the bank's going down could have led to a domino effect. The Bank of England knew that, but sent a letter that was several pages long to the Treasury Committee to explain why it was not morally right to put liquidity into the market. A week later, that was done. If I were in the City, I would want security and confidence in people's judgment and I would want consistency, and I would be wondering what on earth was going wrong with the Bank of England. I am just throwing that in. It is easy to take a lazy kick at the FSA, but the Bank has to answer questions, too.
	The hon. Member for Ludlow (Mr. Dunne) asked a question, and I shall respond. I would go to the tripartite arrangements and why they did not work. First, I support the assessment of the ex-chairman of the FSA, which he gave in a speech at Oxford. He said that considering the tripartite arrangement and how it worked, one should forget about structures and look at people. I thought that that was an interesting remark. Everybody in this Chamber, as a politician, knew what he was saying. It was a valuable but not well-reported comment. As everyone knows, it is possible to build a huge structure with huge organisations, but those organisations are only as good as the people inside them. If the people inside them are not working well, there is a difficulty.
	Let me be controversial. Attacks may be made on me from all sides, but as a cynical and hard-bitten politician I wonder whether the Bank of England saw this as something for which that upstart the FSA was responsible. It is well known that the Bank of England as an institution did not like either those powers being taken from it or the creation of the FSA.

Colin Breed: indicated dissent.

George Mudie: I know; I understand. I do not mind people disagreeing if they put another theory into the frame. Here is one—although I could not push it. In Committee, I picked up on strains between all three parties. The Chancellor was always very loyal, although hon. Members will expect me to say that. The Bank of England, on occasions, attempted to land the Chancellor in it. The FSA and the Bank had some bad vibes and were unwilling to be forthcoming about the conversations that they had had. That points towards bad relationships that, I think, might have contributed to the problem. We should think about those relationships.
	My right hon. Friend the Member for West Dunbartonshire spoke about war games. Another factor was the newness of the Chancellor. We should remember that he had been in office for only a month, whereas the Governor of the Bank of England had been in post for five years and McCarthy has been around for a considerable time. Strong, able and confident as the Chancellor is in such situations, he has to look at those people of experience— [Interruption.] Am I boring the hon. Member for Twickenham already? The Chancellor would certainly have to look to long-standing officials of such stature for advice. The conflicts that went on are very interesting.
	I agree that we should be careful about regulation. The trouble is that when there is a crisis or when something has blown up, we change the regulation to deal with that. However, that is not why we should be changing the regulation. We should think of what will happen in the future. We should say, "That's what has happened; deal with it by changing the regulation lightly, if you will, but do not over-regulate."

Colin Breed: Does the hon. Gentleman agree that regulation is no substitute for responsibility? However much we want to regulate, it is the responsibility of the people who made the initial decisions that they should have been right, while regulation is the back-up. Regulation is legalistic, but we really want oversight. We want from those individuals not just regulation but an oversight of what is happening in the industry and with individuals.

George Mudie: The hon. Gentleman puts his finger on the problem.
	I want to say just two more things. The first is about regulation. I fear that we would see decent regulation as ticking boxes. Even after this crisis, I do not think that we have learned the lesson of decent regulation in this respect. No central banker—neither the FSA nor a central banker on the model of Greenspan—will be willing to regulate. Let me explain. We, the FSA and the Bank of England clocked the dangers with such securities. Our criticism was that they were not spoken about loudly enough and that no effective action was taken, either. That does not surprise me, because of the comment made by Greenspan. Northern Rock was not the problem. Securitisation was the problem, but, as we see from the losses, securitisation was making tremendous profits. It would therefore have taken a brave central banker to take the big step, which would have avoided the problems with Northern Rock and the worries that we are experiencing, of speaking out loudly and taking action against the contaminated securitisation that was going on. Greenspan put his finger on it: no central banker has that courage, or sees that as their role. It would be interfering in the market, and the market makes money, so people interfere at their peril. People watch and put on record a bit of what they see, but they let things run their course, and when things fall apart, they go in to pick up the pieces. That has been the history. When we speak about regulation, we are speaking about regulation at the margins, because the other type of regulation would be seen as interfering with the operation of the market. If the market is making great profits, it is a brave central banker who steps in.
	Lastly, I want to say a word about shareholders. I do not shed tears for them, and particularly not for the market hedge fund shareholders—the vultures who bought shares when they knew that Northern Rock was in trouble. They knew what they were getting into, and endangered the sympathy that people might have felt for the employee shareholders and small shareholders. The behaviour of the market hedge fund shareholders has been disgraceful. They forced an extraordinary general meeting, upped the ante and upset people. I fear that they may have caused a loss of sympathy for the shareholders as a group. If we could divide them, I would be all for a suitable payment being made to the small shareholders, in place of the shares that we have taken. To the hedge fund shareholders, however, I would say, "Of all the shareholders, you were the people who knew what you were getting into, and you deserve nothing," but this is not a perfect world.

John Thurso: May I begin by echoing comments made in the first two contributions to the debate? The first contribution was made by the right hon. Member for West Dunbartonshire (John McFall), and I echo what he said about the staff who helped to produce the Treasury Committee report. They gave not only great quantity, but great quality. The second contribution was made by the hon. Member for Sevenoaks (Mr. Fallon), and he paid tribute to the Chairman; it is worth restating what he said.
	I should also like to pick up on a comment that the hon. Member for Leeds, East (Mr. Mudie) made about my hon. Friend the Member for Twickenham (Dr. Cable). He is probably right to say that my hon. Friend's comments were harsh but accurate. The hon. Gentleman asked me to have a word with my hon. Friend after the debate. I say this to my hon. Friend: he is absolutely right, but it is worth bearing in mind that since we issued our report back in January, much evidence has come out. We were working on the basis of the evidence that we were given. My hon. Friend raised with me the point that although many eminent people gave one level of evidence, there are now somewhat different views coming out. He said that we might like to look again at the matter at some point, and perhaps it is an issue to which the Committee will return.
	I do not want to go over the whole report; I will cherry-pick a couple of points. The hon. Member for Leeds, East made a valuable point, the theme of which was people. That is the issue that we ignore at our peril. Interestingly, when I attended an industry dinner last week, I sat next to an eminent director of an eminent company, who said to me, "Why on earth did you bother to rescue Northern Rock? Why didn't you just let it go under? What was the purpose of rescuing it?" It is worth reminding ourselves of what we all set out to do. There are, of course, two reasons for what we did. The first, obvious, and probably most important, reason to act was to avoid contagion in the banking industry. We saw what contagion could do, if let loose, when we saw a televised run on a bank. Not only was it the first run on a bank in more than a century, but it was televised. The run gathered pace like a brushfire, so the Government were absolutely right to act quickly to deal with the situation.
	The second reason concerns our relationship with depositors—an issue that a number of speakers have raised. It is important that we look at what we mean when we talk about financial stability, as the hon. Member for Sevenoaks said. An important part of it is that the ordinary citizen should have confidence that when they place an amount of money in a bank, they do not find themselves the lowest unsecured creditor in the chain. We have heard the term "moral hazard" applied to banks, but during our inquiry, I heard the term applied to the high street depositor. That is why the old system was not 100 per cent. The idea was that there should be some moral hazard attached to the depositor. That is ridiculous, and has been proved to be so. If the entire weight of the regulatory system cannot ensure sufficient due diligence, how on earth can the individual in the street be expected to ensure it? A clear lesson from our report is that there should be 100 per cent. protection, up to an amount, to ensure that depositors are looked after.
	Our report makes it quite clear that the start of it all was the board of a bank that made some fairly disastrous decisions. It followed a very high-risk model. There are a few points arising from that, all of them about people. One of them concerns the board. Comment has been made about its composition, but there is a general point to be made. I serve on a plc board as a non-executive, and have served on other boards. I am deeply concerned that, after Greenbury, Cadbury, and all the other reports that have been produced, a box-ticking mindset has entered into many sectors of corporate governance, replacing an old-fashioned, common-sense duty of care. That duty of care needs to be recaptured. If the board of Northern Rock had applied a common-sense test, as opposed to ticking a lot of boxes, it might have realised what was so obvious to all of us, with hindsight—that its model was extreme.
	The last point about the company itself is that it was under tremendous pressure from the City and City investors to produce good-quality figures quarterly. I question whether banks are the appropriate vehicles for high risk and high return; we debated that point today. In return for banks having a degree of protection and a safety-net available to them, there must be a degree of utility as regards them. I would not take that too far, and I certainly would not go as far as the right hon. Member for Holborn and St. Pancras (Frank Dobson) does, but if banks are to be in that position, there has to be a balance. We should not really look to them for high risk and high rates of return.
	I now come to the tripartite authorities. Again, it is a question of people. The point was well made by the Chairman of the Select Committee and the hon. Member for Leeds, East that the relationships that existed in 1997, which were left over from a previous generation, no longer exist. The war game aspect is important, because while all three entities made mistakes, and all tried to do their best, things failed totally when the three of them had to act in concert in a crisis. It is that kind of work, which the right hon. Member for Norwich, South (Mr. Clarke) likened to Cobra planning in the services, that needs to be done. It is not yesterday's crisis, which has been regulated for, that has to be dealt with. What are needed are the people with the training and the skills to move in to deal with tomorrow's crisis.
	My last point on the topic of people concerns leadership. It is clear that we all expected the Treasury to be the lead organisation of the tripartite authorities in such an affair. There are many mitigating circumstances. Many of the key players in the Treasury at official level had moved next door not long before. There was a relatively new ministerial team. There were several reasons why the people were not necessarily in place, as they could have been. Concern is expressed in articles in the  Financial Times today and in other financial pages about whether the Treasury has the skills in depth that it needs. That is not a criticism of any person. I recall that when I used to run businesses, one would look at the organisation and say, "These are good people, but have they been trained sufficiently? Between them all, are there the necessary skills?" It is a worry that the Treasury does not have those skills, and I hope it will be put right.
	A further point, which is not to do with people, is the stigmatisation of the lender of last resort. As the right hon. Member for Hitchin and Harpenden (Mr. Lilley) so eloquently pointed out, in order to work, the system must have an inherent flaw in it, and that is dealt with through the lender of last resort. Effectively, the status of the lender of last resort was stigmatised in the press. I do not remember which of the big five banks it was, but one of them had a little borrowing operation earlier, and newspapers were ringing up anybody and everybody to try and find out whether another bank had the same thing. If we are to have a lender of last resort, which is a prerequisite for ensuring that the system works smoothly, there cannot be a stigma attached to it.
	Finally, on house prices, we in the United Kingdom have a curious house market which, for historical reasons, delivers an increase in price and equity that is not shared with many European countries. Two parts of the market work simultaneously. One is a lack of supply of houses and land, and the other is an over-supply of money. When those two come together, the problem arises. My hon. Friend the Member for Twickenham has often made the point that we cannot rely on that kind of growth in the future.
	Like all great calamities, the run on the Rock, like the Tay bridge disaster, required a series of events to take place in an unforeseen order. It is easy, with hindsight, to point out all the things that went wrong. We must ensure for the future that there are the right people in the right place with the right skills and sufficient training. We need to make sure that banks as individual organisations are properly regulated and that—the point that our report makes—the system as a whole has overarching supervision.

Sally Keeble: I am grateful for the chance to take part in a debate that has been thoughtful and constructive. As a member of the Select Committee, I add my thanks to the staff of the Committee, who did a superb job, producing two complex and extremely good reports in a short time, and to our Chairman, for making sure that we achieved consensus in an area that could have been fraught.
	I shall focus on the topic of moving forward and the broad themes discussed by previous speakers. The right hon. Member for Hitchin and Harpenden (Mr. Lilley) said—I hope I do not summarise him unfairly—that there was a problem with the macro system, and indeed there is. Others said that political factors drove some of the decisions that were made. Some acknowledged that things went wrong, but argued that that does not mean that the regulation needs to be changed or increased for the entire system.
	Of course there are difficulties in the macro banking system, but I do not believe that the system is totally fractured. It needs to move forward, not back to where banking used to be some years ago. I refute the idea that there were political factors driving the decisions. The Treasury took the best decisions in extremely difficult circumstances, and we must move forward cautiously. No doubt over the coming months there will be many more difficult decisions to take in respect of Northern Rock.
	Changes are needed to regulation in the banking system. I shall pick out parts of the Select Committee's report which deal with that. One of the frustrating aspects of our inquiry was that everybody said that they did their job. Every box was ticked, yet we ended up with a disaster. In the course of the investigation it became clear that there was no interface between the regulatory system and what was going wrong in Northern Rock. Everybody said, "We all saw that it was an extreme business model. We all knew the kind of mortgages that were being provided. We all knew that they were over-reliant on the wholesale market, even if we did not know the full extent", and so on, yet there was no intersection between the regulatory requirements and what was happening in Northern Rock, until it was too late.
	A section in the Committee's report, "The run on the Rock" highlights the fact that Northern Rock had a Basel II approval and on that basis had agreed to increase its interim dividend. That was a reflection of slightly different factors, but it fed the impression that Northern Rock was doing well and could afford to pay out. It increased its payout at just the time that it was running into liquidity problems. That was one symptom of the fact that the regulatory system at the time did not deal with the problems that would cause, as everyone has said, the first run on a bank in the UK for about 140 years.
	A few of the weaknesses emerged in the course of our inquiry. In many ways the FSA has done a superb job, but it has always focused on macro issues and preserving the reputation of the industry internationally which, ironically, has been so damaged. Previous speakers mentioned the slowness of response, especially in the case of the tripartite system, and prior to that, the slowness of the FSA in recognising and tackling the problems that it had clues about.
	My right hon. Friend the Member for West Dunbartonshire (John McFall) spoke about the proposals for structural changes in regulation. I agree that those are important, as he said, to put a bit of grit into the system, to make it impact more on the problems, and to identify a lead person who would deal with problems of the kind that emerged in Northern Rock.
	I want to discuss two aspects of regulation in the changed circumstances. First, what will happen to the credit rating agencies? Our inquiry highlighted some serious problems, and the Committee's proposals are set out in the sixth report of the Session. We identified a conflict of interest by which the credit rating agencies provide both advice to financial institutions on how financial institutions should package products and the ratings for those products. Although the agencies assured us that they have safeguards and Chinese walls, the whole Committee felt that the safeguards are not adequate.
	Secondly, there is a lack of competition, because two US agencies and one European agency mop up almost the entire business.

Greg Hands: That is a common misconception about credit rating agencies. The ratings are best viewed on a relative basis: the fact that something is rated AAA does not mean that it is infallible; it means that it is much more credit worthy than something rated AA. If comparators are necessary, a concentration in three or four firms is inevitable, because the agencies require global reach to compare, for example, a small bank in Japan with a large multinational corporation in the United States.

Sally Keeble: The hon. Gentleman has set out the defence for the credit rating agencies. The Committee heard that view at great length, but I was not convinced by organisations that advise on structuring a package to obtain the necessary credit rating to sell the products, but—this emerged in the evidence hearings—do not scrutinise the details of the products that are being bundled up, which is a real weakness.
	A number of hon. Members have criticised the securitisation process, but I have not criticised it, because such products are bound to exist in a complex world that contains global financial markets. It keeps the system going by providing products in which the Chinese and others can invest, but bundled products require close scrutiny. Throughout the Northern Rock fiasco, people said, "We did not know that sub-prime mortgages were so risky," or "We did not know exactly what was being bundled up in that product."
	If, for example, my constituents' pension funds are going to rely on those products, I want security and assurance. The credit rating agencies did not provide that, and it is right to criticise them and demand more. As my right hon. Friend the Chancellor has repeatedly said, the ratings are just health warnings, and it is down to everyone to observe due diligence. There is no particular reason why people should accept the ratings as gospel, and they should consider other factors, too.
	The evidence presented informally and formally by the industry suggested that the due diligence to back up the assessments of the credit rating agencies is not routinely conducted, which is a severe problem. I am not worried about sophisticated investors, economists and hedge funds, but I do not want my constituents' pensions and homes to rely on financial products that have not been sufficiently scrutinised and properly assessed by the banks and financial institutions that have invested in them.
	The recommendations in the report are modest, and it is important that they are chased through the financial system. I am pleased about the debate in the financial press about the need for greater scrutiny of credit rating agencies. I am also pleased that the Financial Secretary and her colleagues in government are taking the matter forward, and I hope that she will say more about that.

Frank Dobson: In view of what my hon. Friend has rightly said about the recognition by some of the financial columns that things are wrong, does she find it strange that whenever Standard and Poor's or a similar firm provides a credit rating, it is still treated as if it were a tablet of stone?

Sally Keeble: Yes. There has been a lot of discussion about the complexity of the products and whether people understand them. If people are not prepared to undertake the necessary scrutiny and due diligence, there is still an over-reliance on those assessments. The health warning that those ratings are just one measure has fallen on deaf ears, which is one reason why the credit rating agencies should be examined more carefully.
	On the liquidity rules, Northern Rock ticked all the boxes on liquidity, which is 5 per cent. or five days' business falling due. I am concerned that the measure is not adequate, and we should revisit the issue. Other banks have similar liquidity profiles, albeit that they are not so reliant on the wholesale financial market, which was Northern Rock's problem. If we are to implement a regime that minimises the likelihood of the Northern Rock situation being repeated, we must re-examine the rules and requirements on liquidity. However, we cannot do that on our own, and I would be grateful if the Financial Secretary discussed progress in the international discussion.
	On the future of regulation, big changes are taking place, which should produce lighter-touch regulation—so-called principles-based regulation. I hope that there will be careful oversight as we move towards that, because I have some qualms whether that approach will provide the rigorous scrutiny and detailed management that is needed given the current rather turbulent times.
	I repeat that the Government were right to consider the private sector options before going for nationalisation. As the process moves forward, I hope that we achieve a realistic and rational discussion about Northern Rock and its future and learn some of the hard lessons spelled out in the report, which will ensure that the chances of a future Northern Rock are kept to the absolute minimum and that our constituents feel more secure in their finances and more confident about the financial and banking system.

Greg Hands: I do not want to talk much about banking reform. Instead, I want to have an urgent look at what has been happening at Northern Rock in the two weeks or so since the nationalisation on 22 February. One of the most interesting things is that there has been virtually no press, media or parliamentary interest in what has been going on at the bank during that period. With the exception of a few well placed questions from Conservatives at Treasury questions, there has been remarkably little interest.
	The  Financial Times has covered only one aspect in the past two and half weeks; I shall come on to the coverage of the  Financial Times shortly—it is not infallible by any stretch of the imagination. That one aspect was that representatives from the British Bankers Association had been to see the Treasury to discuss possible market distortions, to which I shall come back in due course.
	At Treasury questions last Thursday, the Chancellor put everything down to the business plan; he said that everybody would have to wait for that and that there would be no answers to any questions until then. The Chancellor also said:
	"We have had many discussions with the Commission"—[ Official Report, 6 March 2008; Vol. 472, c. 1896.]
	I find that particularly interesting. I shall come to the role of the European Commission.
	Before we rush into a new regulatory regime, we urgently need to have a look at what has been going on in this institution, which we own, in the past two and a half weeks. As I mentioned during the Second Reading of the Banking (Special Provisions) Bill, I worked on a trading floor for eight years in the 1990s. Bank regulation is not my specialist field, but I know rather a lot about banking malpractice in respect of risk control, risk management and related issues and about the effect it can have on the markets. What I have seen in Northern Rock since 22 February has been an institution whose behaviour, even since nationalisation, has carried on being reckless and unsustainable. That is very serious given that we, the people, now own it.
	Let me start with the foreign subsidiaries.  [Interruption.] A couple of hon. Members are looking at me as if to ask, "What are those foreign subsidiaries?" I mentioned the  Financial Times earlier. On 23 February, the day following nationalisation, its editorial said that the European Commission would not intervene. It added:
	"Northern Rock also has the advantage of operating exclusively in the UK.
	The Commission is more likely to give a government a free hand when the only economy being distorted is its own."
	The  Financial Times certainly thought that Northern Rock was exclusively a UK business.
	I shall start by considering the Danish subsidiary. Its website, available in Danish and English, mentions "swilling interest" next to a picture of a large, bloated pig—an interesting way of marketing products in Denmark. The Danish subsidiary shows that Northern Rock is being reckless with UK taxpayers' money. The bank is both subsidising and guaranteeing above-market savers' rates to 10,000 Danish depositors—10,000 and counting, very rapidly. In the week after nationalisation, the website welcomed visitors to Northern Rock Denmark, saying that it was open for "business as usual". Under the heading "Temporary Public Ownership: What It Means For You", it stated:
	"Your savings with Northern Rock continue to be safe and secure, protected by the UK government guarantee arrangements".
	Why are the UK Government both guaranteeing and subsidising above-market interest rates to savers in Denmark? For one year, the UK Government will give 4.09 per cent. The Copenhagen inter-bank offered rate, or CIBOR, is currently about 4(5)/8 per cent., so why are the UK Government paying Danish savers 5 per cent. through Northern Rock's Danish subsidiary? The website of Northern Rock's Irish subsidiary also mentions "business as usual". It gives a fixed rate for euros of 5 per cent.—staggeringly high, considering that the euro LIBOR is currently at 4.25 per cent.
	Let us turn to Northern Rock Guernsey, the offshore aspect of the bank. That subsidiary also offers an interesting set of products. Its website states:
	"Investing offshore is the perfect solution for expatriates, foreign nationals or UK residents wishing to take advantage of tax planning opportunities".
	So a UK taxpayer-owned bank is enticing UK taxpayers to avoid paying UK tax. That is all at our expense. The website says:
	"Northern Rock's operations in Guernsey remain open for business as usual".
	What rates does that subsidiary offer? Offshore in Guernsey, someone can buy a Northern Rock bond that will yield 6.75 per cent. for a year; UK gilts currently pay 3.86 per cent.—one gets almost 300 basis points more for sticking money, at the UK Government's risk, in Guernsey than for keeping it in the UK. The same is true for money invested over three years: one can get 6.4 per cent. from Northern Rock Guernsey, compared to a gilt yield over the same period of 3.83 per cent. Staggeringly, a UK Government-owned bank is enticing UK taxpayers to invest offshore to avoid tax in this country.
	Finally, let us look at what is going on in our home market. There are extraordinary Northern Rock products that not only pay a very above-market interest rate, but have extraordinary conditions extremely favourable to the saver. I point hon. Members to the fixed-rate access bond issue 4. If someone invests a minimum of £1, they will get from that 6 per cent. for one year, effective from 4 March. Similar products from Barclays offer only 5 per cent. with a minimum of £500 and no access to the money during the year. Alliance & Leicester will also pay 5 per cent. on its fixed-rate bonds for one year, but early withdrawal costs 180 days'—half a year's—interest. That offer has a £1,000 minimum. Alliance & Leicester, of course, has been in the news quite a bit recently for possibly being under pressure in the market for reasons similar to Northern Rock's. Yet the Northern Rock product offers a 6 per cent. interest rate—far higher than that offered by Alliance & Leicester or Barclays. Not only that, the Northern Rock product has this important clause:
	"Withdrawals can be made without any notice or charges".
	That is what is called a putable deposit. If interest rates rose, savers could easily pull their money out and stick it in a higher-yielding account, which would become available in an environment of rising interest rates. That is an incredibly useful option for the depositor. Why is Northern Rock, not only through its foreign subsidiaries but in this country, offering incredibly high, above-market interest rates? We need to consider those issues before we start discussing changing the regulatory regime. We need to look at what has been going on in the past two and half weeks; some staggering things have been happening.
	In the past, the focus has been on Northern Rock's reckless lending, but the bank has also been borrowing recklessly. As we know, Britain has the lowest savings rate of anywhere in the EU, and Northern Rock has been forced to go to countries such as Denmark and Ireland, and offshore, to hoover up savings from countries with higher savings rates.
	What can we do to seek reform? We need to consider risk management at Northern Rock. We know nothing about what controls and risk management measures are in place at this new bank that we have taken on. It is no use our waiting for the business plan, because the risk is here right now. We could be exposed to any number of risks—systemic risk, event risk, the risk from rogue traders—through today's Northern Rock. Who knows what risk management there is in place at the moment?
	Since I left banking in 1997, there has been huge growth in risk management, which is now a major part of most of our financial institutions. In my day, there were three or four risk management people out in the back, next to the legal compliance people and others with what in those days were called "peripheral functions". Now, however, risk management is right at the centre. Unfortunately, we know nothing about the risk management of this new institution. There was clearly a failure in the risk management of Northern Rock in the summer of 2007, and before, when we saw LIBOR rising and the risk of the drying up of liquidity in the inter-bank market. The possibility of that happening should have been foreseen in Northern Rock's risk management structure and policy. There is no reason to believe that that has changed one bit since 22 February; I rather suspect that the same individuals are in charge of it today as were there three weeks ago.
	How is Northern Rock managing its currency risk? I have just talked about its foreign subsidiaries. How is it managing the risk as regards having to repay those Danish savers in Danish krone in a year's time? Similarly, with the Irish savers, what kind of currency risk management is being undertaken in relation to the euro? What is its interest rate risk management strategy? It is offering a large number of fixed rate savings products, yet most of its mortgage lending is variable, as is most of its wholesale funding—if that is happening, as I suspect it now is.
	What is the political risk? It is by no stretch of the imagination impossible that there could be political risk in a state-owned bank; indeed, it happens all the time. Bankgesellschaft Berlin, a German financial institution, got into severe difficulties only five years ago because of inappropriate lending due to political influence. We heard on Second Reading the extraordinary statement by the Chief Secretary to the Treasury that one of the reasons for the speed of the nationalisation of Northern Rock and the urgency behind taking over this £50 billion-odd mortgage portfolio was that we were at the "bottom of the market". I do not know which market she was referring to—the housing market, the mortgage market or the interest rate market—but she was taking a massive punt on whatever market it was, and she offered no evidence to back up her decision.
	What kind of scrutiny are we going to give Northern Rock in this House? Last week, I tabled a set of questions to ask exactly how we are going to study this £110 billion business that we now own. Will there be a Question Time? If, as we did earlier, we have a 10-minute Question Time on the Olympic games, which has a budget of only £9 billion, should we not have a separate Question Time on Northern Rock, which is a £110 billion business? With the honourable exception of my hon. Friends at Question Time last Thursday, there has been woefully little parliamentary scrutiny of Northern Rock since nationalisation.
	My professional experience in banking predates the tripartite regime, so I cannot comment on how effective it is. I have found time to read the Treasury Committee's report—possibly the first time that I have read a Select Committee report not produced by one of the two Committees I sit on. Like other Members on both sides of the House, notably my hon. Friend the Member for Sevenoaks (Mr. Fallon), I urge caution against over-hasty and over-heavy regulation in reaction to one event. I have seen some of the major financial scandals and failures of the past 20 years, including in the 1990s. I was there during the Hammersmith and Fulham council swaps scandal. In the early '90s, the Belgian Ministry of Finance lost an enormous amount of money betting on convergence of European interest rates. Then there were the cases of Orange county, the US army facilities management fund and Barings bank. There are not necessarily common features to all those disasters. To some extent, there always will be financial failures. It is our duty as a Parliament to create an oversight structure that seeks to prevent them and to prepare for the consequences, but we have to balance that with a duty to ensure that business is not impeded or encumbered.
	We need to act cautiously in changing the regulatory system, but we must act urgently to consider the situation that we now face and to ensure that proper risk management controls are in place at this new Government Department called Northern Rock bank. In other words, we need to think about banking regulatory reform, but the more urgent and important issue is what our arrangements are for the oversight of Northern Rock, which is continuing many of the practices that were in place before nationalisation in an often dangerous and reckless manner.

Philip Dunne: I am pleased to be able to contribute to the tail end of this debate.
	The Treasury Committee report is a fine example of a Select Committee having undertaken relevant, topical and timely work, and it is the only independent investigation into affairs surrounding the run on the Rock that has been published so far. I congratulate the Chairman and other members of the Committee, on which I sit, on conducting the hearings that we did and producing a unanimous report. As has been said by Members on both sides of the House, it has captured the imagination of policy makers and commentators as being of value. It is a shame that the Government have not yet grasped some of our recommendations, and I hope that the Financial Secretary will pick up on some of them.
	I should like to touch on some of the lessons from the past for Northern Rock before looking forward. The hon. Member for Leeds, East (Mr. Mudie) referred to the tulip bubble and to the American sovereign debt crisis, and my hon. Friend the Member for Hammersmith and Fulham (Mr. Hands) mentioned problems closer to home—at least, closer to his constituency. Financial institutions do go bust. Periodically, there is a herd mentality in financial markets. That is within human nature, and it is not possible to regulate against it. As a consequence, one arrives at extremes, on the way up and on the way down, in any financial market. We would be ill advised to think that one set of banking reforms can call a halt to that process.
	The last mortgage bank in this country to fail was National Mortgage Bank in 1992. Although it was much smaller than Northern Rock, there are many parallels. Not least, it was owned by a quoted company, National Home Loans; it relied on wholesale funding, mostly foreign banks; and its business model was not robust when working capital became scarce. In that case, the then deputy governor was able to deploy his famous eyebrows to nominate Barclays to put together a syndicate of 26 banks to provide the required funding, which was covertly guaranteed by the Bank of England. Eddie George, for it was he, did so to protect the reputation of British banking among foreign banks, which were the entities due to lose out from the crisis. Unfortunately, the parallels in the conduct of the Northern Rock case have not enhanced the reputation of regulators or of the Government. Last week, the Chairman of the Select Committee and I attended a debate in the City about whether the case has affected the City's reputation. The commentators present were more or less united in the view that the City survives these periodic crises, but the reputation of the regulators and, by extension, that of the Government, suffer. I think that that is regrettably the case.
	The role of the banking regulators should not be to protect individual banks from the folly of their conduct, but to limit damage in the event of a failure leading to a systemic problem infecting other financial institutions. When the tripartite arrangements were set up 10 years ago, the focus was very much on giving the Bank of England, through the Monetary Policy Committee, the power to set interest rates and to remove that from the political process. Much less attention was given to the regulatory regime for supervision that was put in place at the same time. There was talk of having a new paradigm, with no prospect of a major bank getting into difficulty. As a consequence, as we discovered through the Select Committee inquiries, no stress test was undertaken, when the system was set up or since, on a major bank—that is, one of the top dozen—getting into financial difficulty. That is a fundamental failing of the regime that was set up 10 years ago, from which we need to learn a lesson.
	There are some specific lessons to take from the Northern Rock experience. Although we say in our report that there was systemic risk, there were conflicting views at the time when the crisis was unfolding. Who knows how history will look at this with the benefit of hindsight, but people may take a different view from those of us on the front line.
	At that time, during August, the Governor of the Bank of England initially appeared to think that there was not a systemic risk, as he was resting on the moral hazard argument that we touched on earlier. The Chancellor, perhaps concerned about the political ramifications, thought that there was moral hazard, but it took him a long time to recognise that, and he stepped in only when the queues were snaking round from the Northern Rock branch front doors. The Financial Services Authority seemed to think that there was a problem, but was not in a position to force the sort of quick decision making needed to get a grip on the crisis.
	There were four distinct phases to the crisis that I should like briefly to mention. It is instructive to identify what went wrong in order to decide what needs to be put right. First, in the year leading up to 9 August, various signals were issued by market commentators, and by the Bank of England in January and the FSA in April, that reliance for funding on credit markets internationally was of concern, particularly given the emerging developments in the US sub-prime mortgage sector. Those warnings were not acted upon by the board of Northern Rock, which failed to put in place stand-by lines of credit in the event that its securitisation programmes could not be rolled over.
	The bank's business model, in terms of growing its market share, was clearly reckless, as has been touched on by the hon. Member for Twickenham (Dr. Cable). At a time when house prices in the UK were hitting record highs, this bank was extending its market share dramatically; in the first half of 2007, it captured 19 per cent. of new mortgage advances, compared with its overall market share of 8 per cent.—the former is some 2.3 times higher. At the same time, other major mortgage lenders, such as Nationwide, were reducing their new business exposure. If the regulators did pick that up, they failed to persuade the board to do anything to moderate Northern Rock's rate of expansion.
	The second phase covered the period from 9 August, when the credit crisis struck and closed down the securitisation markets, until 10 September, the date on which the Chancellor finally declined the offer of a lender of last resort facility to Lloyds TSB. Lloyds TSB had indicated that it would be prepared to make an offer should such a facility be available, but only in those circumstances. During that month-long period, the lack of experience of handling a stricken bank in a crisis was exposed at the Bank of England, where, famously, no one was specifically in charge; at the FSA, which consistently advised the Chancellor that Northern Rock was solvent; and at the Treasury, where a new ministerial team had only just been appointed with no one aside from the Chancellor having any prior experience in the Department, and with no senior officials with experience of a previous banking crisis. Advice to the Chancellor on whether a covert operation could be undertaken was confused, with the Bank of England convinced that the market abuse directive prevented covert activities, despite subsequent denials by the European Central Bank and the European Union commissioner, and the evidence of facilities provided to continental banks in a similar situation.
	The third phase was a short one, lasting from Monday 10 September to Monday 17 September. That was the period in which critical decisions, or a lack of timely decision making, actively contributed to the run on the bank. Once the Lloyds TSB offer was finally terminated, the Chancellor and his advisers should have acted far more rapidly to get a grip on the developing crisis. Specifically, they should have confirmed the deposit guarantee at the same time as announcing the lender of last resort facility. It was that lack of action on deposits that led to the queues around Northern Rock branches.
	The final phase lasted from the announcement of Government support on 17 September, which was extended on 9 October, until final nationalisation on 22 February, more than five months later. That delay speaks volumes about the lack of experience in the Treasury in handling such crises. Every previous banking crisis has been handled as rapidly as possible, from Johnson Matthey to Barings, or the National Home Loans crisis to which I referred earlier. Those were all handled within a week—sometimes over a weekend. The failure to find a credible private sector buyer should have been apparent when the remaining bidders in December were clearly insubstantial and not credible.
	Now the bank has been nationalised, one or two issues need to be addressed. The business plan referred to by my hon. Friend the Member for Hammersmith and Fulham (Mr. Hands) is clearly critical, and the Government have agreed, somewhat reluctantly, that it will be published once it has been finalised by Mr. Sandler. The plan is critical to Northern Rock's relationship with its funding entity Granite, and to the quality of loans—the asset base that the FSA has consistently said is of high quality. The hon. Member for Twickenham has said that it may not be so sound.
	Granite has not been nationalised, but its securitisation issues are backed by Northern Rock mortgages. Northern Rock is obliged to top up that security package if mortgage repayments or redemptions exceed the rate of maturity of the securitisation issues. We learned that, from the September period until nationalisation, no additional mortgages have been provided to Granite by Northern Rock. That can last for a while, but at some stage—I would argue that it will be when the two-year interest rate fixed terms expire at around January of next year—unless very attractive rates are offered, mortgages will be redeemed at what may be a more rapid rate than hitherto.
	If Granite's security package declines and Northern Rock cannot refresh the mortgages that it provides for that underlying security, an accelerated amortisation will be triggered and Granite will be compelled to liquidate at whatever price it can get for its remaining assets. At that point, Granite's structure will implode, Northern Rock will suffer losses on its 16 per cent. share of the mortgages in Granite, and the taxpayer will lose substantial sums—substantially more than we have been led to believe by the Chancellor. He says that, with business as usual, there will be no loss. The expression "business as usual" is critical, and I shall return to that point.
	I have four points to make on banking reform, some of which have been touched on by others. First, we need to fix the bust tripartite regime. The Chancellor's proposals for banking reform seem to reward the FSA and give it the primary role. But supervisors are not bankers; there is a fundamental flaw to that idea. The supervisors who monitor a bank have a vested interest, once it goes wrong, in validating the quality of its assets. The situation would be the same for individuals who put loans on to the balance sheet in the first place. As soon as a bank goes wrong, they must be taken off the case because they have a vested interest in arguing that the loans are good.
	As the hon. Member for Leeds, East mentioned, we learned only today, as a result of a freedom of information request, that five out of the seven individuals in the FSA with some responsibility for supervising Northern Rock have now left their posts. All of them should have left their posts within a few days of the situation going wrong. They should have been replaced by experts who are accustomed to dealing with bank work-outs.
	Secondly, on the Bank of England, the Treasury Committee made a recommendation in its report with which I wholeheartedly agree. We should establish an individual in the Bank with the credibility that stems from the title of deputy governor who has responsibility, as the head of financial stability, for maintaining relationships and running a stricken bank in crisis. It was interesting to me that the right hon. Member for Norwich, South (Mr. Clarke) came into the Chamber specifically to support that recommendation, and I hope that the Financial Secretary will give us her initial view of it. There is clearly widespread support for it throughout the House.
	On the subject of deposit protection, it is agreed that small depositors need to be protected. Had 100 per cent. protection existed up to the £35,000 level, which is now in place, the run on the bank would not have occurred. I have some questions—I raised them in Committee, but I went along with the report—about the feasibility of a pre-funding scheme for depositor protection. It is a good idea but it needs to happen over a prolonged period. Banks currently lack trust in each other and are therefore not lending money. To some extent, that gives them a bit of liquidity on their balance sheets, but as we experience weekly, a new sector of the financial community is calling in facilities. The banks therefore need their facilities to fund their obligations, and if we imposed a significant additional obligation to provide funding for a deposit protection scheme, we would be doing so at precisely the wrong time. It would aggravate the current liquidity crisis.
	I suggest that the Financial Secretary examine the existing deposits that commercial banks have with the Bank of England. Some £2.7 billion is currently sitting on deposit. Interest on that money funds the operations of the Bank of England, but also generates a profit for the Treasury. That profit could be used as an insurance policy to provide significantly greater insurance protection, or the capital sum could be used as a first call on a deposit protection scheme. Money is sitting there and I urge Treasury Ministers to consider those suggestions. The alternative is to build up such a fund gradually, over a period of years. However, that would inevitably run the risk of the good banks bailing out the poor banks, and I do not support that.
	Thirdly, other hon. Members have mentioned capital adequacy. The Basel II regulations, which were introduced last year, need to be reconsidered by international bodies. As has been said, Northern Rock used Basel II to justify increasing its dividends as recently as last July. Banks are actively incentivised by Basel II to encourage debt of more than 365 days to be placed in off-balance-sheet vehicles. One reason that banks welcomed Basel II is that it allowed them to take more of their existing commitments off balance sheet and have less capital on balance sheet. That seems a perverse incentive to me. A solution can be achieved only through international co-operation, and I hope that the Treasury and the Bank of England are actively engaged internationally with financial authorities to consider what adjustments need to be made, especially to capital adequacy but also to banking reforms.
	Fourthly, other speakers have mentioned credit rating agencies. We discovered in the Committee an inherent and multiple conflict of interest at work. I found it extraordinary that, according to Standard and Poor's figures, the credit rating agencies currently give 570 corporates, financial institutions, insurance companies and sovereign issuers a triple A rating while, as at the end of last year, they gave 9,418 special investment vehicles a triple A rating. That large disparity has mushroomed in recent years and clearly drives the credit rating agencies' business model. We need more competition and that needs to be achieved on an international basis. This country cannot start imposing a regime on only credit rating agencies that operate here, because that would drive the securitisation business offshore, and we clearly do not need to do that.
	What will we do when the next crisis arrives? The impact of global credit contraction is not yet over. The initial impact has been on the banks, from bailing out their off-balance-sheet vehicles. It recently struck the monoline insurers and is now affecting the hedge fund community. Where will it strike next? There is little clear understanding of where leveraged securities are held in the financial system. We should not be surprised if insurance companies emerge with lower bonuses and significant holdings, especially in countries such as Japan, where they have been desperate for yield, with such low interest rates. We should not surprised if pension funds are affected.
	Northern Rock was fundamentally a domestic business, although my hon. Friend the Member for Hammersmith and Fulham said that it is now conducting activities in three other jurisdictions, which was news to the House. No nation's central bank is large enough to cope with the failure of a major bank. What will the Chancellor do if a similar sized—or, heaven help us, larger—bank needs help? The latest legislation gives the Treasury the power to step in during the next year until the banking reform Bill is in place. A much wider framework of solutions is needed. Rather than hoping and praying that something else will not happen to this country, we need to work with international organisations and devise an international framework of supervision, which will be effective as and when the larger crisis occurs.

Mark Hoban: The debate has been conducted in a measured and reasonable tone. I congratulate my hon. Friends the Members for Sevenoaks (Mr. Fallon) and for Cities of London and Westminster (Mr. Field), my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) and my hon. Friends the Members for Hammersmith and Fulham (Mr. Hands) and for Ludlow (Mr. Dunne) on their contributions, as well as the hon. Members for Twickenham (Dr. Cable) and for Caithness, Sutherland and Easter Ross (John Thurso) and the right hon. Member for Holborn and St. Pancras (Frank Dobson), who presented a stout defence of old Labour's values, but seemed sadly out of place in today's Chamber and today's Labour party. I also congratulate the right hon. Member for Norwich, South (Mr. Clarke), the hon. Members for West Bromwich, West (Mr. Bailey), for Leeds, East (Mr. Mudie) and for Northampton, North (Ms Keeble), and especially the right hon. Member for West Dunbartonshire (John McFall).
	The right hon. Member for West Dunbartonshire opened the debate in characteristically understated fashion and thus made the Treasury Committee's critique of the events of the past few months all the more devastating. The Committee's report, which found consensus among its members, sets out some of the major issues that we need to face when considering banking reform, and analysed thoroughly the reasons for the position today, whereby the Government have nationalised Northern Rock.
	We all accept that the credit crunch is a global problem and that it was and remains a significant challenge to financial markets and Governments. It was also a significant test of the tripartite arrangements, which the Prime Minister introduced and which were found wanting. The hon. Members for Leeds, East and for Caithness, Sutherland and Easter Ross said that perhaps the people involved contributed to the problem. However, I strongly believe that any institution that is set up to regulate the financial services sector should be effective, regardless of who fulfils the roles of, for example, chairman of the Financial Services Authority, Governor of the Bank of England or even Chancellor of the Exchequer. Those arrangements should work whether it is the first or last day of someone's time in office. When we consider the Government's reforms, which they will introduce later this year, we must ensure that they work regardless of the personnel involved.
	As the report makes clear, there are concerns about the regulatory supervision of Northern Rock by the FSA—it goes into some detail about that. We should welcome the fact that the FSA is conducting its own review of its relationship with Northern Rock.
	The report also highlights the role of the Bank of England and the provision of liquidity in the market. I believe that the report is right when it says that it is difficult to assess whether the Bank of England, by responding to calls from other financial institutions to increase liquidity, would have prevented Northern Rock's problems from emerging. There is no clear cut case one way or the other.
	The most telling criticism of the events of the past few months focuses on the steps that were taken when it was decided that the Bank of England should act as lender of last resort. The mishandling of the announcement triggered the panic on our high streets and led to the Government being forced to announce the guarantees on Monday 17 September. It was clear that the tripartite authorities expected that the announcement could have a negative impact on depositors. Sir John Gieve, whom the report quotes, said:
	"In the event we knew that there was a risk that that balance would go the wrong way and it did."
	The Governor of the Bank of England said:
	"The nature of a bank run is that it is a knife edge: it might happen, it might not. That is exactly why a bank run is so difficult to handle."
	I believe that that view was supported by Callum McCarthy. Given that uncertainty about how the announcement about lender of last resort status would be taken by the depositors, it is regrettable that more thought was not given to the contingency plans that should be in place or the handling of the announcement.
	I was interested in the comments that the right hon. Member for Norwich, South made, when he contrasted what happened in September with his experience of the events in London of 7 July 2005. They were two very different experiences, but the fact that there was a well organised and well oiled machine in place on 7 July is in stark contrast with what happened in the days around the Bank of England's declaration that it would extend facilities to Northern Rock. Insufficient thought had gone into the presentation of that decision, which did not go down well with the electorate or Northern Rock's depositors.
	Once people saw the queues running round the block, that triggered the questions: what do we do now? What is our contingency plan? Again, it was clear that insufficient thought had gone into the guarantees and related issues, and that the discussion on the guarantees was not brought to the attention of the principals until 16 September, which was the day before they were made. It therefore appears that the response to the run was cobbled together, rather than being part of a long-planned-for procedure.
	Comments have been made about war-gaming and whether people should have gone through the scenarios. It is clear from the report that there had been some wa-gaming and discussion about what should happen. The Governor of the Bank of England pointed out—again, this is supported by the chairman of the FSA—that more work needed to be done on the arrangements for handling a banking crisis. The Governor described that work as urgent, but unfortunately it did not proceed with an appropriate degree of urgency. As a consequence, when the banking crisis happened in September, the arrangements were not in place to handle the situation in a way that would give confidence to depositors at an important moment.
	Having identified the risks two or three years ago, the Government did not prepare for a banking crisis and did not take the action that the Governor had said should be taken, which created a problem in the long term. Consequently, when the arrangements that were put together by the Prime Minister faced their first test, they failed because of a lack of leadership and a lack of preparation. The Treasury should take ultimate responsibility for those problems.
	Let us consider the actions that we need to take. There is common ground on the need to intervene earlier to prevent the deterioration of a bank's position. The shadow Chancellor, my hon. Friend the Member for Tatton (Mr. Osborne), made that argument in December and the Chancellor has adopted that approach. Rather like the Treasury Committee and the right hon. Member for Norwich, South, we believe that the powers for early intervention should rest with the Bank, not the FSA, which flows from the Bank's role in money markets and its responsibility for monetary policy. Also, the fact that it acts as the lender of last resort means that it should have the powers to intervene. That will lead to some overlap between the Bank and the FSA, but the Treasury Committee was right to talk about the need for
	"'creative tension' within the regulatory system".
	It is right to have that tension there and to create institutional arrangements that are perhaps not as tidy, but which would be more effective. We also believe that the deputy governor's role in respect of financial stability should be enhanced and that an experienced banker should fill that role, as an understanding of financial markets and institutions will be critical to the Bank's wider powers of intervention.
	We have advocated a special resolution regime for the banks concerned. There should also be powers to ensure that deposits protected by the deposit insurance scheme are ring-fenced.
	I shall talk briefly about the deposit protection scheme. It is important that the scheme should provide reassurance to customers when there is a banking crisis. It is right to revisit the scheme in the light of the problems that we have seen. We believe that it is right to increase the cover to £50,000 and, crucially, to streamline the administration of the scheme so that protected deposits are paid out quickly, which again should reassure consumers. We differ from the Treasury Committee in that we believe that the scheme should be not a pre-funded scheme, but a post-funded scheme. A pre-funded scheme would impose an additional unnecessary cost on banks and other deposit takers, which would be borne by customers and shareholders. Deposit protection schemes should be a safety net. We should have a regulatory system that is predicated on effective regulation and the prevention of crises, rather than one focused on picking up the cost of failure.
	As both the British Bankers Association and the CBI have made clear in recent days, it is important that we should get those reforms in the banking sector right. My hon. Friend the Member for Sevenoaks was right to be sceptical of the benefits that further regulation could introduce. We have seen the impact of the Sarbanes-Oxley rules on financial markets in the US and we cannot afford to make the same mistakes in this country.
	We are still left with unfinished business in connection with Northern Rock. The nationalisation of Northern Rock is not an end in itself and is meant to be only temporary. However, no one can quite tell us how long "temporary" is meant to be, so perhaps the Financial Secretary could clarify that this evening. We are still waiting for the Treasury to bring forward the framework agreement between itself and Northern Rock's management setting out the strategic direction of the nationalised business. We are still awaiting the business plan from Ron Sandler, which will determine the future size and shape of Northern Rock. I should be grateful if the Financial Secretary could clarify further when we might expect to see both the framework agreement and the business plan.
	The cynic might think that the publication of those documents has been delayed to avoid the political fallout if the strategic objectives and the business plan require a shrinking of Northern Rock's staff, which would be particularly damaging to the Labour party in the north-east. I hope that the publication of those documents will not be delayed until after the local elections at the start of May, because that would do a great disservice to the taxpayers and would go to the heart of the point that my hon. Friend the Member for Hammersmith and Fulham made about insufficient accountability and transparency to the House about the operations of what has been referred to as the people's bank.
	We also know that widespread concerns have been expressed about the anti-competitive impact that the Government's guarantees for Northern Rock could have on the markets for mortgages and savings products. We welcome the assurances given during the passage of the Banking (Special Provisions) Act 2008 that the Office of Fair Trading would play a significant role in monitoring that. Could the Minister update us on how discussions with the BBA and the Building Societies Association on that issue are being pursued?
	One issue that has perpetually dogged the debate about Northern Rock is the treatment of Granite, which my hon. Friend the Member for Ludlow has raised persistently over weeks, as has the hon. Member for Twickenham. There is a debate about what liabilities the taxpayer has taken on—again, that is reflected in the supplementary estimate, which comments that our liabilities are "unquantifiable". The Office for National Statistics is clear that they include Granite. That was the thrust of the ONS's evidence to the Treasury Committee last week, when Martin Kellaway said:
	"The Granite securitisation is complex. To whom do the risks and rewards accrue? They accrue to Northern Rock".
	On that basis, taxpayers will bear the risk of Granite's funding, but the Chancellor in his letter to the hon. Member for Twickenham said:
	"Granite and only Granite is liable to its bondholders under any scenario. The Government has not provided any guarantee arrangements to...bondholders."
	Will the Minister tell us who is right? Is it the ONS, which is the custodian of the true figures for Government debt, or is it the Chancellor who wants to keep those debts off the Government's balance sheet and avoid the Government's fiscal rules being breached if they exceed 40 per cent. of GDP?
	The Government cannot continue trying to deny the fact that the taxpayer has taken on significant obligations through the nationalisation of Northern Rock. It is time that the fiscal rules and the measurement of the Government's debt properly took into account Northern Rock's full liabilities, so that taxpayers will know the risk that they are exposed to, as a consequence of nationalisation. That is the big gap that we seem to have in this debate. Whether in respect of the quality of the assets that have been acquired by nationalisation or the taxpayer's exposure, we need to do much more work to ensure the transparency of Northern Rock to the taxpayer and the House.
	No one should dismiss what happened to Northern Rock as simply the consequence of a global credit crunch. As the report indicates, Northern Rock's problems, although created by its management and their strategy, have become a headache for each and every one of us, as a consequence of the mismanagement of the crisis. I am afraid that that mismanagement is down to the Government, who must shoulder the blame for every taxpayer in the country having a second mortgage on their homes as a consequence of the nationalisation of Northern Rock.

Jane Kennedy: It is pleasure to follow the hon. Member for Fareham (Mr. Hoban), and I agree with his opening comments on the quality of the debate; the tone in which it has been conducted has been exemplary. I compliment my right hon. Friend the Member for West Dunbartonshire (John McFall) on introducing the debate, and I compliment the work of his Select Committee on its report, a large part of which we acknowledge has huge merit. The Select Committee clearly cherishes the report, as witnessed by the number of the members of the Committee who have taken part in the debate this evening. Even the hon. Member for Ludlow (Mr. Dunne) has stayed throughout, despite struggling with his voice.
	I will try to respond in a way that does the debate justice, as is always the case with debate of this nature. If any hon. Member is looking over my shoulder, they should not be surprised to see a great deal of red on my prepared notes. I will try to deal with a number of points, but I hope that hon. Members who have raised issues that have been well rehearsed will forgive me for perhaps focusing on some of the other issues that the Select Committee report has quite properly raised, to which it is important that I give an early response or an indication of what our response might be.
	Just for a moment or two, I shall set out my version of the background. A number of Members have offered their versions and some interesting analysis of what happened and why the circumstances came about. As hon. Members will know, not least because of the detailed description of last summer's events in the Select Committee's report, the emergence of problems in the American sub-prime mortgage market led to banks either lending money to one another at much higher rates than previously or not doing so at all. That, in turn, created severe problems for Northern Rock in accessing the financing that its business model relied on, and it had no alternative strategy to cope with those problems.
	To prevent Northern Rock from going under, which would have risked instability spreading and serious consequences for the UK's financial system—something that hon. Members on both sides of the House generally accept—and to prevent risks to the wider economy, the Government authorised the Bank of England to provide special liquidity support, and the Government arrangements for retail and wholesale depositors were also put in place.
	The Select Committee's report criticises the timing of those guarantee arrangements, but as the Chancellor made clear in his evidence to the Committee, it was not at all clear that an earlier announcement would have stopped the queues forming over the weekend. It was also important to be clear about exactly what was being guaranteed and to make an announcement once the markets had closed.
	Since those events in September, the Government have explored every option to resolve the situation with regard to Northern Rock and to meet the three principles that we have consistently set out: protecting the taxpayer, protecting depositors and maintaining financial stability.

Greg Hands: May I ask the Financial Secretary a quick question about Northern Rock Guernsey? Its prospectus on its website says:
	"Northern Rock (Guernsey)...does not accept applications from residents of the African continent with the exception of applications from residents of Egypt, South Africa and Zimbabwe".
	What can she tell us about the offshore banking deposits in Northern Rock taken from residents of Zimbabwe?

Jane Kennedy: I acknowledged the expertise that the hon. Gentleman brings to the debate.  [ Interruption. ] If he will allow me to continue and not just shout during my response to his remarks, he might hear one or two things that he might welcome. He has a very interesting analysis of what happened and he supports much, although not all, of the thrust of the Select Committee's report, but I hope that he will accept that that sort of detail is a matter for Northern Rock. We must leave such issues to the management of Northern Rock to take forward, because our arrangements for Northern Rock have been clearly made so that it is at arm's length. Those will be matters for the leadership to respond to in detail.

Philip Dunne: rose—

Jane Kennedy: I feel a little bit like my hon. Friend the Member for Leeds, East (Mr. Mudie), who feared that he might be attacked from all sides.

Philip Dunne: The Financial Secretary referred earlier to the discussions with the EU competition authorities. Presumably, the fact that Northern Rock is currently providing above-market deposit rates will be of interest to the EU competition authorities.

Jane Kennedy: I could have made a point about that in response to the hon. Member for Hammersmith and Fulham (Mr. Hands), but we have covered such areas many times before— [ Interruption ]—not in the detail that he mentioned, but I hope that the hon. Member for Ludlow will accept all the issues raised in today's debate and the detail that the Select Committee has included in its report will be looked at very carefully by the Government. We are engaged in a detailed consultation. Opposition Members in particular have criticised us for not doing more, but I draw to their attention—they may have failed to see it—the very significant response that has been included in a well-received consultation document that responds in many respects, although not all, to some of the Select Committee's recommendations. It is entirely appropriate that we now learn the lessons of the experience of last summer and the decisions and circumstances that led us to nationalise Northern Rock.
	The decision to nationalise was taken some weeks after the Select Committee had completed its work, but none the less, we can take into account what then happened and look at the detail of its report and the Government's response to date with, I hope, a positive outlook.
	My right hon. Friend the Member for West Dunbartonshire said that there was too much political involvement in Government proposals for a Cobra-style arrangement during the crisis. A number of hon. Members raised that issue. The Government are consulting on how such arrangements should operate in practice and which institution is involved in which circumstances. Beyond that, we agree with my right hon. Friend that the Chancellor should have the final say on any decision that involves money and that the Bank of England is responsible for the provision of general liquidity. The House may want to know that the memorandum of understanding between the three authorities will also be revised to clarify responsibilities for decisions taken in a crisis.
	My right hon. Friend the Member for West Dunbartonshire—again, along with other Members—questioned whether the FSA failed in its regulation of liquidity risk. Primary responsibility for liquidity risk management by banks lies with banks' boards and management—that is a difficult sentence to get out—and that theme runs through our whole response to this situation. The FSA is reviewing its regulation of liquidity risk in the light of the recent events to learn lessons from market turbulence. The FSA published a discussion paper in December that sets out preliminary ideas for reform. It had a very good response to that document, and it is considering further how to respond to those responses. There is an ongoing debate about how it should respond.
	A number of hon. Members asked about international work. The FSA is considering responses to the discussion paper and in the context of ongoing international work on liquidity by the Basel Committee, which a number of hon. Members have mentioned. The FSA expects to publish more definitive proposals in the summer of 2008.
	My right hon. Friend also said that the FSA should work more closely with the boards of banks to identify issues early and take corrective action quickly. As set out in the tripartite consultation to which I have referred, the FSA intends to consult on new rules to require banks to produce additional evidence to the FSA at short notice, including strategies for correcting any problem identified.
	My right hon. Friend the Member for Norwich, South (Mr. Clarke), who has not rejoined us, argued very passionately and persuasively—as did a number of other Members, including most lately the hon. Members for Ludlow and for Fareham—for a new deputy governor and head of financial stability. All those Members will have seen that we proposed changes to the governance arrangements relating to the Court of the Bank of England to enhance its effectiveness, particularly in respect of financial stability. We also propose establishing a statutory role for the Bank of England again in respect of financial stability. These are ongoing consultations, and we do not seek to be prescriptive. We will listen to the representations in the ongoing debate around exactly what the new structure should be. The Government are thus taking these issues very seriously. As hon. Members will know, the Treasury, along with other tripartite authorities, published that discussion paper.
	Let me deal now with the Government's proposals for banking reform, which several Members asked about. We are proposing reform around five core objectives and those proposals build on examples of best practice around the world, many of which are highlighted in the Treasury Committee's report. The hon. Member for Hammersmith and Fulham and the right hon. Member for Hitchin and Harpenden (Mr. Lilley) raised questions about international precedence, and the hon. Member for Twickenham (Dr. Cable) proposed the US model, about whose adoption the hon. Member for Hammersmith and Fulham advised caution. It is true that most industrialised countries have a regime for banks either defined in law—in the US and Japan, for example—or created by specific exemptions carved out for financial institutions from the general insolvency law, as in France and Italy. At that point I was particularly taken with the suggestion by my hon. Friend the Member for Leeds, East that we read the book, "A Random Walk Down Wall Street" if we have not already done so; I shall see whether there is a copy in the Library. I look forward to reading it.
	The first objective of our reforms is to strengthen the stability and resilience of the financial system. That covers similar ground to the more recent Treasury Committee report on financial stability and transparency, which we also welcome—in relation to the operation of the securitisation markets, for example.
	The second objective is to reduce the likelihood of banks' failing. That includes new powers for the Financial Services Authority to gather and share early information and to make improvements to the framework for the provision of liquidity assistance. I am very conscious that another debate is about to take place, Mr. Deputy Speaker, so I offer my regrets if I do not manage to cover all the issues that have been raised. They are all important, but I will try to cover those that I think the House would most like me to deal with.
	A number of Members attacked, although some defended, the role of credit rating agencies. The current tripartite consultation to which I have referred identifies a number of causes for concern about the role of credit rating agencies, including conflicts of interest, the information content of ratings and over-reliance on ratings. We are supporting international work by the Financial Stability Forum and the European Union to look further into the role of rating agencies in financial markets. The Treasury, the Bank of England and the FSA are fully involved in those discussions, so I hope that that reassures not only those Members who had concerns about credit rating agencies but those who wanted to see us work more in an international context.
	My hon. Friend the Member for West Bromwich, West (Mr. Bailey) asked a very good question: if the FSA did not use its powers, what was the point of giving it any more? That is a paraphrase of what he said. The FSA is reviewing its internal supervisory systems in the light of Northern Rock and it will publish some conclusions in the spring. My hon. Friend also asked why we do not treat building societies in the same way as banks. The authorities appreciate that building societies are fundamentally different from retail banks; however, they must mitigate the risk of a building society failing, so they are consulting on which parts of the special resolution regime should be applied to building societies. We propose that liquidity assistance provided by the Bank of England should be exempt from the calculation of the proportion of building society funding which arises from wholesale funding. That change, would remove an impediment to a building society being able to borrow from the Bank of England and would ensure that building societies are treated in a similar way to banks for these purposes.
	I am very much up against the clock at this stage, but I cannot resist responding to my right hon. and dear Friend the Member for Holborn and St. Pancras (Frank Dobson), whose rumbustious contribution raised several always very interesting points. I would like to reassure him on one particular point—that interventions using special resolution tools, which interfered with shareholders' property rights, would be to secure the wider public interest in financial stability, the continuity of banking services and the protection of depositors. Very careful consideration would need to be given as to whether compensatable value remained in a bank where such interventions were necessary. In other words, shareholders are a long way down the list of those who will be considered for compensation.
	This has been a very interesting debate, to which I have been privileged to listen and to be invited to respond. We have a wide-ranging set of proposals and the Government are committed to legislating on them as soon as possible—but only when we are satisfied that we secured the right response to the circumstances that we all lived through last summer. These proposals are only part of our work to learn the lessons from what has happened over the last six months or so. As the Chancellor has set out, we are also determined to play a full role in the European Union's and the international response to what has clearly been an international series of events. The UK is heavily involved in work at both the EU and the G7 level to analyse the causes of market turbulence and to develop an appropriate international response.
	As I hope I have explained, the Government are looking closely at the issues raised by the Treasury Committee under the chairmanship of my right hon. Friend the Member for West Dunbartonshire. We will keep the Committee's views firmly in mind as we continue to consult on our proposals and as we take them forward to legislation.
	 Question deferred, pursuant to Standing Order No. 54(4) and (5) (Consideration of estimates).

Department for Transport
	 — 
	London Underground

[Relevant document: The Second Report from the Transport Committee, Session 2007-08, HC 45, on the London Underground and the public-private partnership agreements.]
	 Motion made, and Question proposed,
	That, for the year ending with 31st March 2008, for expenditure by the Department for Transport—
	(1) further resources, not exceeding £2,059,473,000, be authorised for use as set out in HC 273,
	(2) a further sum, not exceeding £1,859,129,000, be granted to Her Majesty out of the Consolidated Fund to meet the costs as so set out, and
	(3) limits as so set out be set on appropriations in aid.— [Liz Blackman.]

Louise Ellman: I wish to record the apologies of my hon. Friend the Member for Crewe and Nantwich (Mrs. Dunwoody), the Chairman of the Transport Committee, who is recovering from illness.
	I am very pleased, Mr. Deputy Speaker, that the House has the opportunity to consider the Transport Committee's report on London Underground and the public-private sector partnership agreements. The PPPs on London Underground are the Government's creation and have always been extremely controversial. This short inquiry centred, however, on the spectacular collapse of Metronet, one of two private sector consortiums that had signed 30-year PPP contracts to renovate and modernise specific parts of the London Underground. The two Metronet infracos went into administration on 18 July 2007 following the failure of an appeal to the PPP arbiter for additional funding through an increase in the infrastructure service charge.
	As the Select Committee's report clearly documents, that was a double failure: it was a failure to deliver public services and it was a catastrophic financial failure. Contracts that were supposed to deliver 35 station upgrades over the first three years in fact delivered 14—a 40 per cent. delivery of the requirements. Stations that were supposed to cost Metronet-SSL £2 million in fact cost £7.5 million—375 per cent. over the anticipated cost. By November 2006, only 65 per cent. of scheduled track renewal had been achieved.
	If that were not enough, the service delivery failure has come with a £2 billion financial tag—a tag reported tonight in the estimates' request for additional funding—which takes three forms. First, there is a £1.7 billion grant to Transport for London to cover Metronet's debts; and, secondly, a £158 million grant for Transport for London, which is understood to be the first instalment of the costs caused by Metronet's going into administration—and it is believed that the total cost of that is about £630 million. The third part is £150 million of further grant to Transport for London in recognition of the increased costs. I hope that the Minister will inform the House whether that is, indeed, the full bill and what the impact of approving that additional funding will be on other transport projects.
	The Committee took evidence from the PPP's arbiter, Unite, the Transport Salaried Staffs Association, Tube Lines, the chairman of the Greater London assembly's transport committee, the former chairman of Metronet, the PPP administrator at Transport for London and the Secretary of State. The report reveals shocking deficiencies in the construction and operation of the failed PPP contracts. Those include a tied supply chain, with most of the capital expenditure contracts awarded to Metronet's parent companies—WS Atkins, Balfour Beatty, Bombardier, EDF Energy and Thames Water. Risk transfer was minimised with 95 per cent. of lenders' debt guaranteed by London Underground. In short, as the report concluded,
	"the Metronet contract did nothing more than secure loans, 95 per cent. of which were in any case underwritten by the public purse, at an inflated cost—the worst of both possible worlds. As with the shareholders, what minimal risk was borne by Metronet's lenders was disproportionately well rewarded, at the expense of the tax and fare payer."
	A reading of the Committee's report indicates that what has happened is nothing short of a national scandal.
	The report identifies the failings of the PPP in both concept and practice, and makes recommendations for the future, suggesting that the PPP itself might be a flawed model, but indicating the importance of transparency and accountability to ensure efficiency and value for money in future, through a public or private sector vehicle. Following the collapse of Metronet, Transport for London was the only applicant to take over its work. In October last year, a memorandum of understanding was signed between the Department for Transport and Transport for London.
	Important questions arise from the report and subsequent events, which I hope the Minister will be able to answer. How will the delay in Metronet coming out of administration affect what is to happen next, and how will it affect costs? It was anticipated that Metronet would come out of administration by 18 January. That has not happened. If finance for the future cannot be secured at reasonable terms, without guaranteeing the vast majority of the debt in the public sector, will loans direct to the Government be considered? Do the Government agree with the Committee's findings that there should be no further PPPs without a comprehensive assessment of genuine risk transfer? It is vital that the Government remember the catastrophic collapse of Metronet when its parent companies next bid for publicly funded work. That is extremely important, as is the future of the repairs and upgrades on the London underground.
	The Government entered into the PPP, with great controversy, because of their concern about some inefficiencies in the public sector. However, it is important that they remember that when private companies fail to deliver on large public projects, those private companies can walk away and the taxpayer picks up the pieces. That is, indeed, what is happening with Metronet.

David Taylor: In the light of the powerful analysis in the report, which I warmly welcome having been a long-term and trenchant critic of PPP and its cousin, the private finance initiative, does my hon. Friend feel that there is a serious risk that, at some time in the short to medium term, Tube Lines will go the same way as Metronet? Does she agree that the way of avoiding the catastrophic costs and impact on the public is to take Tube Lines back in-house as soon as possible so that its shareholders cannot meander quietly into the darkness of a tunnel to pocket their profits while we taxpayers have to underwrite their incompetence and veracity?

Louise Ellman: I share my hon. Friend's concerns. The Committee's recommends constant monitoring and that the requirement for annual reviews be followed to ensure public value for the money spent.

Nick Raynsford: As a representative of the area served by Tube Lines, I am surprised to hear the views expressed by my hon. Friend the Member for North-West Leicestershire (David Taylor) and, indeed, by my hon. Friend the Member for Liverpool, Riverside (Mrs. Ellman), implying an absolute parallel between Tube Lines and Metronet. There is not. Our experience of Tube Lines' management of the Jubilee line has generally been very satisfactory. It has increased capacity and improved efficiency and performed good station updates, whereas the procurement of the Jubilee line under the traditional arrangements produced a serious cost overspend of about £1.5 billion and a much delayed introduction. I hope that my hon. Friend the Member for Liverpool, Riverside will give a more reasoned appraisal of the respective performances of the different PPP contractors, bearing in mind that although Metronet failed, it is not a basis for criticising the performance of Tube Lines.

Louise Ellman: I can assure my right hon. Friend that the Committee's evidence did not indicate a parallel between Metronet and Tube Lines. However, it would be prudent to take the lessons of what happened with Metronet's failure to ensure that it is not repeated.
	As my right hon. Friends the Secretary of State and the Minister look ahead at what should happen now in order to take over from where Metronet failed, I hope that the Minister will give an assurance that the lessons of Metronet's failure have been learned, and that she will ensure that the public benefit from much-needed improvement on the underground and that they get value for money from the investment that goes into much-needed public services.

Norman Baker: May I say how collectively sorry we are that the hon. Member for Crewe and Nantwich (Mrs. Dunwoody) is not with us? I very much hope that the hon. Member for Liverpool, Riverside (Mrs. Ellman) will pass on my good wishes and doubtless those of colleagues on both sides of the House.
	There is no doubt that this PPP has been a catastrophic and expensive failure, as the hon. Lady indicated; it has also been an avoidable one. There is no doubt that some of the measures put in place to set up the PPP were flawed from the beginning, and I shall come back to some of them. The consequences are the one or two lines in the enormous tome produced by the Treasury that sets out the billions of pounds of taxpayers' money that has been necessary to deal with the problem that was unnecessarily created. The Secretary of State herself called the measure "a terrible failure" when she gave evidence to the Committee, and the hon. Member for Liverpool, Riverside rightly referred to the failure to deliver stations and track maintenance and to get anywhere near meeting any of the targets that were set for Metronet.
	It is worth going back to 1998, when the PPP was rushed through. Hon. Members may recall that at the time there was considerable uncertainty about whether the PPP was the correct course of action to follow. The Mayor, whatever else his faults, was clear that it was not the appropriate measure. He called the PPP "inherently unworkable". He even took High Court action—unsuccessfully—to stop it, whereas the Chancellor at the time, now Prime Minister, talked about the PPP in glowing terms, saying that it would remove the need for public subsidy entirely, which reminded me of the suggestion that nuclear power might be too cheap to meter. Perhaps we should mind the yawning gap between the Government's policy platform and the drain down which public finances roll.
	This is the second debate today indicating a failure of the Treasury to get a hold on important financial matters. We had a debate on Northern Rock and now this debate on Metronet. Metronet has plenty of faults, but I want to come on to the Government, because they cannot escape the blame for the situation.
	The Government have even managed to alienate some of their supporters who were in favour of PPP or PFI schemes. Jeremy Warner, the respected economic journalist, wrote in  The Independent that the justifications for the PPP that needed to be met
	"seem to have been largely trashed by the experience of Metronet".
	One of them was that
	"the private sector is likely to invest the money more efficiently than the state and so achieve a cheaper end result."
	It is difficult to see how that has applied in the case of Metronet. Jeremy Warner also spoke of the PPP's sharing the risk of a cost overrun, which is difficult to justify in this case, given that London Underground has been landed with 95 per cent. of the debt.
	The Liberal Democrats do not take the dogmatic view that PPP is always the right solution or always the wrong solution. I disagree with the Committee's absolute hostility to it, although I would add that the Government's trust and confidence in it has not been borne out by reality. As late as 18 July last year, the Prime Minister was still saying—in response to a question from my hon. Friend the Member for Twickenham (Dr. Cable)—
	"If Metronet pulls out, another company will be found to take its place".—[ Official Report, 18 July 2007; Vol. 463, c. 276.]
	That was clearly the Government's preferred model at that stage, but of course it has not been possible to implement it.

Graham Stringer: The hon. Gentleman was being uncharacteristically inaccurate and unfair to the Committee when he said that it was totally hostile to PPP. We examined what happened, and it is a sad story, but if the hon. Gentleman reads paragraph 21 of the conclusion he will find that the Committee believed that Metronet's failure should be thought about and understood before a PPP is considered again. I would describe that as a very balanced look at what was going on, not as total hostility.

Norman Baker: I agree that that paragraph is balanced, but I would suggest that any reading of the report—and I have spent most of today reading it—leads to only one conclusion, which is that there is hostility to the concept of the PPP throughout. Paragraph 96 states:
	"The circumstances of Metronet's end have shown that the private sector will never wittingly expose itself to substantial risk without ensuring that it is proportionately, if not generously rewarded. It is ultimately the taxpayer who pays the price."
	I am not suggesting that the Committee was wrong to examine some of those matters. Clearly there has been a significant failure that needs to be addressed, and there are lessons to be learned. One of those lessons is that the private sector will naturally seek to minimise risk and to maximise profit. Of course it will: that is what it is there for. But it is the job of Government to ensure that the rules are set down—the tracks are laid out, if you like—in such a way as to prevent the incurring of disbenefit by the taxpayer, which in this instance the Government have failed to do. That does not mean that they will not be able to do it in future with some other PPP arrangements, but the fact remains that they spectacularly failed to do it on this occasion.
	The Government's failure to sell Metronet to the private sector following the collapse means that the costs of operating in administration, and the costs of the overspend, will be picked up by the public purse. It is not clear to me, although it may be to others, to what extent that will be a matter for the Treasury and to what extent it will be a matter for Transport for London. It would be helpful to hear from the Minister exactly where the arrangements lie. Pursuant to that question, we also need to know whether Metronet's spectacular failure will lead to a scaling down or a lengthening of the process by which the improvements to London Underground were planned. Will work that was to be undertaken in, say, 2012 be delayed until 2016 or 2017? What are the consequences of the failure for the planned works? I think that people in London would like to know the answer to that question.

Justine Greening: I can certainly tell the hon. Gentleman what is happening at East Putney station. From what I can make out, the modernisation is being put on hold, and at the very least is being delayed.

Norman Baker: I fear the worst when I hear the evidence from East Putney. I hope the Minister will tell us that that is not the case.

David Taylor: Does the hon. Gentleman agree with my right hon. Friend the Member for Greenwich and Woolwich (Mr. Raynsford) that no lessons need to be learned about the supervision of the Tube Lines contract from this spectacular collapse, although the company's only exposure is the £180 million of equity it has invested in the project and although, four years into a 30-year project, it has already made a "profit" of nearly £160 million? That is not much of an exposure to risk, is it?

Norman Baker: The original PPP contract with Metronet was clearly very flawed, and the contract with Tube Lines cannot be perfect either. It should be said, however, that far fewer complaints and concerns have been raised about Tube Lines. It is important to look at each company on the basis of its delivery, and Tube Lines appears to be in a rather better state than Metronet ever was.

Nick Raynsford: I apologise for having to intervene in the hon. Gentleman's speech, but I think I should put the record straight, because the interpretation placed on my remarks by my hon. Friend the Member for North-West Leicestershire (David Taylor) simply is not correct. I merely observed that it was wrong to draw general conclusions about the PPP on the basis of the specific failure of Metronet. My own experience, like that of a number of others, is that the performance of Tube Lines in terms of efficient management and improvement of its service is generally satisfactory, and I think that that too should be taken into account in any balanced and non-dogmatic appraisal of the PPP.

Norman Baker: I will not try to referee the contest on the Labour Benches. I agree that it is not necessarily possible to draw general conclusions from this or that PPP, although it might be possible to draw conclusions about the Treasury.
	What kind of PPP was this? We have heard about the tied supply chain. It is a disgrace that Metronet should give business to its parent companies without any defence, ensuring neither value for money nor the exposure of those companies in the event of a problem. How could that have got past the Government when the project was set up?
	On 17 October, Chris Bolt, the rail regulator but also the arbitrator in this case, told the Committee that Metronet saw this as "a cost-plus contract". That was his assessment: Metronet was there to bump up the price. It wanted to add bits and pieces, and to charge London Underground for the privilege of doing so. We learn that Metronet had equity of only £350 million, which was completely inadequate in relation to the cost of the scheme. The main question to be asked is why on earth it was allowed to get away with the tied supply chain, the cost-plus outlook and the inadequate equity. How can the PPP have been set up on that basis? I remind the House that the Government spent £500 million on legal assistance and consultancy fees. I do not know what advice was being given, but it seems to me that the Treasury might have recouped at least some money for the taxpayer by asking for a refund, because it was obviously singularly badly advised.

Stephen Hammond: Might not the Treasury have been trying to find a way of imposing the scheme and the legal advice enabled it to do so? Could it have been that way around?

Norman Baker: That might well be so. It is difficult to interpret the position differently. But if that was the way in which public money was being spent, it suggests an improper use of public money—and certainly an unwise and ineffectual one, given how matters turned out. A contract that was designed to last for 30 years lasted only four years before collapsing. That is a terrible racket.
	When the Secretary of State gave evidence to the Committee on 7 November, she said:
	"There are always going to be costs in trying to get best value for money for the taxpayer."
	That is a curious statement. It suggests that getting best value for money for the taxpayer means spending lots of other money. It is a strange way of justifying what was a financial disaster for the Government, for the taxpayer and, I am afraid, for the people of London.
	I hope that the Government will learn lessons from this. There are lessons about the micro-management of train matters that they need to take on board. According to an article by Christian Wolmar, Ministers are about to make the same mistake with replacements for high-speed trains on the national rail network. He wrote:
	"Instead of a simple purchasing exercise, the Department for Transport is trying to be very clever and wants bids from consortiums involving train manufacturers and finance houses in a 30-year PPP scheme."
	Have we heard that before somewhere? According to those in the rail industry to whom I have spoken, the cost of the new high-speed trains on the east coast line will be well above what it should be as a consequence of the process in which the Department for Transport is involved. So look out, perhaps, for excessively priced trains on the high-speed east coast line come 2012-13.
	This PPP contract is difficult to defend in any way. It did reward contractors for moving toilets nearer to the drivers' cabs at the end of the line so that they took less time going to the loo. That is, perhaps, one positive aspect that I have managed to find from reading through the PPP contract. It might have saved a couple of quid here and there by that move—or perhaps not when the cost of moving the loos is taken into account. The micro-management in the contract is such that it specifies such matters, yet it is unable to deal at all with the big questions about who Metronet gets its business from, why there were cost-plus contracts, and what would happen if it went into liquidation, which then occurred. No thought was given to that prospect by those who ratcheted up £500 million in bills for the taxpayer in order to give advice—but we did have advice about how near drivers' cabs should be to toilets at the end of platforms.
	The Government need to learn many lessons from this, such as how to run their railway policy, not to micro-manage, and not to look at PPP through rose-tinted spectacles and to understand that it might have a role to play but it will not necessarily be the best option for the taxpayer. They also need to be more open about their own mistakes in 1998 and beyond.

Harry Cohen: I congratulate the Transport Committee on its important report and my hon. Friend the Member for Liverpool, Riverside (Mrs. Ellman) on introducing it so effectively, and I also add my best wishes to my hon. Friend the Member for Crewe and Nantwich (Mrs. Dunwoody).
	I welcome the debate on London Underground's public-private partnership arrangements, as they are in a bad way. That is in fact an understatement following Metronet going into administration last July. Let us not forget that Metronet had responsibility for two thirds—it was probably more than that in reality—of the maintenance of the London underground network. Despite having money flooding in from the Government, the private consortiums have not given value for money overall, and we now have this debacle.
	I was recently travelling in on a District line tube train in the vicinity of Tower Hill station. I advise the Minister to travel in on that line; actually, I do not advise her to do so, as there is a piercing screeching sound for a long way along the route. That was meant to be the responsibility of Metronet, and I suspect that such screeching sounds will affect commuters a lot more now, and give them an unpleasant journey into work and back home.

Justine Greening: I thought it was only me on that tube train that day nearly having my eardrums perforated, but the hon. Gentleman was obviously on the same train.

Harry Cohen: That is proof of what I say. I feel sorry for the London commuters who have to put up with that experience almost daily, and other passengers.
	The private consortiums have done the soft work—the relatively easy work—but even much of that has barely been done. A lot of the major work, however, such as new trains and major station rebuilds, has not been done. I suspect that much of the difficult and expensive signalling and the track work is also still outstanding. We should be given some detail on what still needs to be done, and how much of the important signalling and track work that was thought necessary has not been done. That is despite £1 billion of funding per annum from the Government. Metronet was grossly inefficient, and it was brought down by the cost overruns. The independent PPP arbiter deemed that they were Metronet's responsibility, and Metronet's response was to walk away, leaving a bill for the taxpayer.
	The hon. Member for Lewes (Norman Baker) made a point on consultants, which I wish to repeat. The Government paid them £500 million for this contract, and it resulted in this situation just four years later. Their role has been a rip-off of the taxpayer.

Stephen Hammond: I wonder, therefore, whom the hon. Gentleman blames for the writing of that contract. In his view, there has been a rip-off in respect of the contract. Someone wrote that contract and presumably someone should have been looking out for the public interest. Is it not true that the Department for Transport and the Treasury must therefore be culpable?

Harry Cohen: They are certainly culpable in a number of respects, and they sign off the contract at the end of the day, but they went to the consultants, who charged them a hefty fee. I remember, by the way, that whenever different expert witnesses gave evidence on other topics, such as the safety aspects of splitting up the maintenance from the operation, all of a sudden more consultants who had been paid by Government came along to put a case in favour. This was clearly a waste of money, and the taxpayer was ripped off.
	There is now a colossal waste of money associated with Metronet's administration. I believe the taxpayer is currently paying £14 million a week through Transport for London. If that goes on until 1 April, the total will reach £0.5 billion. In addition, there is the put option guarantee: the Government guaranteed 95 per cent. of Metronet's borrowings from the banks, and the banks have now enforced that, as they had a right to do after six months. That will cost the taxpayer a whopping £1.7 billion. In this context, the repeated position of Treasury and Transport Ministers at the time that those private companies were taking a risk is truly a hollow proposition.

David Taylor: My hon. Friend and I are two of the few public sector accountants in this House. Does he agree that when PPP is at last laid in an unmarked grave somewhere in the City of London, its pallbearers will include Atkins, Balfour Beatty, Bombardier, EDF Energy and Thames Water, whose avarice and arrogance have broken all previous financial records?

Harry Cohen: I do agree with that, but there is another point. I have given many speeches on PPP in this Chamber and Westminster Hall, and I am not opposed to a public-private approach provided that the public have control of the situation. That certainly did not happen here. This model was a catastrophe.
	Metronet shareholders' risk is far less than that of the taxpayers; it is limited to £70 million for each of its five corporate shareholders. It has in any case already made £130 million over its four years in pre-tax profits. The individual corporations get away virtually scot-free, because they are still able to secure, and make profits from, all sorts of other Government contracts. The failure is not held against them in any way.
	My hon. Friend the Member for Liverpool, Riverside said that the tube upgrades are already well behind what was promised, but my concern is that they will be delayed a lot further. The briefing from the National Union of Rail, Maritime and Transport Workers said that the upgrades will be delayed by at least two years. I suspect that the delay will be much longer as the bills bite and the Government look for ways for them to be paid.
	I spoke against the PPP model when it was going through this House. I asked countless oral and written questions, and I sponsored and led three specific Westminster Hall debates. I pointed out that PPP was not value for money, that it was risky in cost terms and in dividing maintenance and infrastructure from the operation of the rail network, and that it was front-loaded—a point that still applies in relation to Tube Lines. The contracts are front-loaded, so there is less risk at the beginning; the companies do the less risky work from which they can obtain the profit at the beginning and leave the complex, high-risk work undone. That remains a problem.
	I come to the PPP auction. London Underground made 15 proposals, listing them in order according to which it thought could work. It put the one plucked by the Government 14th out of 15. It has not been applied to any other metro system in the world. The choice was foolhardy and we are paying the price for it by not getting the value for money that the Government said we would get.
	The assumption that accompanied the PPP model was that the private sector would automatically be better than the public sector. It was an ideological obsession. When the Industrial Society, an independent body headed by Will Hutton, examined the matter, it found that the supposedly more efficient private sector was given performance targets that were 5 per cent. lower than what London Underground was delivering. That is how much confidence the Government had in the private sector's ability to do better. That is the flaw in the ideological obsession with the private sector's ability to run things better than the public sector.
	The public sector had run the system for many years with a shortage of money, yet it was still doing a relatively good job in the circumstances. What could it have done with the sort of money available to these private companies? The Transport Committee found that a more than 20-fold increase had taken place in respect of the funding available to the consortiums—we are talking about £44.1 million in 1997-98 as opposed to £1.048 billion in 2004-05. As I said, that was set against a performance benchmark that was 5 per cent. below London Underground's standard. A 2005 Transport for London report stated:
	"In short, performance is not good enough and is less than what was promised."
	I fear that the taxpayer, the council tax payer and the fare payer will pay for this debacle in years to come. The commuter will suffer as maintenance performance declines and work is left undone. That is extremely serious in my part of the world—east London. It will hold the Olympics, and the Government must get a grip on the situation or there will be a transport safety problem in the build-up to the games. That cannot be allowed to happen.
	The Treasury is still exposed to further financial risk from the Tube Lines contract. If Tube Lines is so good, why cannot the guarantee in respect of 95 per cent. of the bank debt be taken away? Why has the taxpayer still got to guarantee 95 per cent. of that debt? Tube Lines deals with Jubilee line maintenance, but that is a new line and loads of money was put into building it, so the job is easy relatively. A lot of investment was also put into the Northern line before it was taken over by Tube Lines. I forecast that the front-loading will mean that when the difficult and expensive work comes up in later years of the 30-year contract, Tube Lines will walk away. The work should be taken fully back in-house. That division between the maintenance and infrastructure, and the operation of the London Underground did not make any sense at the time and certainly makes no sense now. We cannot give any more blank cheques to private consortiums.
	Despite that, a briefing issued today by London First, the business community organisation in London, states:
	"The modernisation programme is likely to cost more than the funds available—in this situation, the programme will have to be scaled back".
	I suspect that that is true, but there is no apology for the failure of the private sector and business, despite a great deal of money having gone in. It also states:
	"A private sector client—like Tube Lines or London and Continental Railways—is more likely to bring commercial discipline and accountability, fresh thinking and contract management than a public sector one".
	That is almost laughable in the context of the Metronet failure. It is almost as though that never happened. London First's position is unbelievable, and it is peddling the same failed ideology. I repeat that the division of responsibilities is awful, inefficient and potentially dangerous.
	The situation is not Mayor Ken's fault. He warned against it and is making the best of a bad job. It is a private sector failure and it was the Government's mistake in choosing the system. Mayor Ken is the best hope of putting it right. The Government should not be seduced a second time by the nonsense of putting the contract out to the private sector. That will not do. They should take the whole lot back in-house and put it under the control of the Mayor and Transport for London.
	I agree with my hon. Friend the Member for Liverpool, Riverside that there must be full transparency and accountability. Serious costs have flowed from the Metronet failure, and the matter must be out in the open. The Government must not compound the problem by covering things up and continuing with the failed system of putting unwarranted faith in the private sector.

Greg Hands: I have just taken part in the Northern Rock debate, and there seems to be something of a theme today: disasters made in Downing street, shocking mismanagement of public funds and cavalier abandon on the part of the Prime Minister. In the case of Northern Rock, the Prime Minister was very much in the background of the fiasco, which involved the credit boom, poor banking oversight, low savings rates and so on. In the case of PPP, he is right at the heart of the matter. Of course, there is another individual involved. The hon. Member for Leyton and Wanstead (Harry Cohen) and I will disagree about the role of the current Mayor, Ken Livingstone, but he is certainly part of the story.
	Before examining what has happened with PPP in the past eight or nine years, I shall share with the House some of the experiences that my constituents face daily on the tube. According to the 2001 census, the borough of Hammersmith and Fulham has the highest percentage of tube users of any local authority area in the whole of Britain, but we suffer from some of the worst lines. My hon. Friends the Members for Wimbledon (Stephen Hammond) and for Putney (Justine Greening) are in their places: we share the Wimbledon branch of the District line, which goes from Earl's Court to Wimbledon, and doubtless both of them will say something about it later.
	A couple of years ago, the Wimbledon branch of the District line was at 92 per cent. of capacity, which was significantly higher than the District line branches to Richmond and Ealing, which are overcrowded themselves. My constituents generally wait between the hours of 7.30 am and 8.30 am on Monday to Friday at such stations as Parsons Green and Fulham Broadway. By the time the train reaches those stations from Wimbledon and Putney, it is already incredibly, inhumanly full. People often have to wait for the third train—

Stephen Hammond: It is even worse than that. As my hon. Friend knows, by the time the train reaches Wimbledon Park, which is where I get on, the shorter rolling stock is full.

Greg Hands: My hon. Friend is absolutely right. I was going to talk about some of the shorter trains on that line in due course. It is already very difficult to get on at the second or third station, let alone the seventh or eighth station on the line.
	After lobbying by the three of us in June 2006, Transport for London agreed to put on one additional peak hour train a day. It was taken from the Olympia line, which upset some of my other constituents. Nevertheless, it was not particularly effective in doing something about the inhuman conditions that prevail on the Wimbledon branch of the District line.

Justine Greening: My hon. Friend might be interested to hear the statistics that I have pulled off London Underground's website, which show that our stretch of the Wimbledon branch has had the footfall equivalent of three trains-worth of extra passengers joining it in the morning rush hour every single day for the past three years.

Greg Hands: I thank my hon. Friend for that intervention. I am sure that her figures are absolutely right. I was going to talk about the overall passenger numbers on the tube and how they have developed in the past couple of years.
	Let us consider the population in our part of west London. Just last year, my local borough, Hammersmith and Fulham, had 7,300 foreign national applications for national insurance numbers. That is a huge number of people among an adult population of 120,000. My parliamentary constituency has the second largest population of any in Britain after the Isle of Wight. Most of those people are in employment and a lot of them go by tube, as my reference to the 2001 census showed. There is an enormous crush to get on that branch of the District line.
	The story is not necessarily much better for the Piccadilly line. In January, I met Piccadilly line managers, who had some very interesting things to say. I met them in the course of a campaign that we have been running to get the Piccadilly line to stop at Stamford Brook and/or Ravenscourt Park stations in my constituency. The District line stops there, but the Piccadilly line sails through. There seems to be no obvious reason why the Piccadilly line should not stop there and it has done so at various times, on a fairly impromptu basis. That is what the campaign is all about.
	The Piccadilly line managers made a strong case against the idea. They said that the sheer number of passengers on the line meant that adding one or two stops would simply compound the overcrowding—the journey would be lengthened by two or three minutes and therefore the number of trains would be reduced. The managers told me that passenger numbers on the whole tube network have risen by 15 per cent. in the past two years. Numbers on the whole network are up by 7 per cent. year on year.
	The numbers on the Piccadilly line have increased the most in that time. In the past 18 months, the number of daily journeys on that line has gone up from 540,000 to 680,000. That is a 24 per cent. increase. Each Piccadilly line train, I was told, is running on average seven minutes late.
	Let me return to PPP. The amazing thing is that the upgrade of the Piccadilly line is not due to happen until 2014. The District line will be upgraded sometime after 2012, despite being a major route to the Olympic site. Those are some of the problems faced by my constituents.
	I shall talk briefly about some of the origins of the situation. We have already heard how PPP was set up. I did some research through some old press cuttings and found the most extraordinary row, which went on between 1991 and 2001 in particular but is still going on to this day, between the current Prime Minister and the Mayor of London over PPP. An article in  The Independent, published on 7 June 1999, was entitled "If your train is late, you should blame Gordon Brown". It is an interesting article, especially when we see that it was written by Ken Livingstone. He went on to say:
	"We all know that when John"—
	the right hon. Member for Kingston upon Hull, East (Mr. Prescott)—
	"settled on 'Public Private Partnership'...as the means to raise the resources, it was because it was the only option the Treasury would sanction."

Clive Efford: Does the hon. Gentleman recall that at the time, his party time was in favour of a wholesale, unbridled privatisation of London Underground, similar to the privatisation of the railways? Does he still advocate that?

Greg Hands: I am glad that the hon. Gentleman mentioned that, because I checked what our party's position was at the time. Archie Norman, then Conservative spokesman on the issue, said:
	"Only...Gordon Brown believes that proceeding with PPP would be in the best interests of Londoners."
	As I recall, the only mayoral candidate in favour of PPP in 2000 was the right hon. Member for Holborn and St. Pancras (Frank Dobson), who ironically made a speech earlier today attacking the capitalist nature of the Northern Rock takeover; it was a classic old Labour, socialistic speech.
	On 19 January 2000, in response to Ken Livingstone's article in  The  Independent , the then Chancellor, now the Prime Minister, riposted in the  Evening Standard:
	"Livingstone must not be London Mayor."
	The article said:
	"Chancellor of the Exchequer Gordon Brown takes the offensive to argue why 'Red Ken' must not get the job."
	In the article, the then Chancellor focused heavily on PPP and attacked Livingstone's opposition to it. He referred to Livingstone's dogma on how to finance the tube, which I find rather ironic, and said that Livingstone was threatening London with the loss of key investment.
	My point is that the row has been going on for nine years, while my constituents and many other Londoners have been suffering. They are victims of a row at the highest level between the Prime Minister and Mayor of London, and the row is still going on today. The Prime Minister refuses to back, or even name, Ken Livingstone in any debate in this House, or any press article. He may refer to the Labour administration at City hall, or say that London needs a Labour Mayor—

Kelvin Hopkins: rose—

Clive Efford: rose—

Greg Hands: I will not take any more interventions because time is short. In 19 years-worth of  Hansard, the Prime Minister has never mentioned Ken Livingstone, either by name or by constituency. The heart of the matter is the row between the Prime Minister and Mayor of London, which has been going on for so long. Unfortunately, it is my constituents who are suffering.

Several hon. Members: rose —

Madam Deputy Speaker: Order. There is limited time left in this debate before the Front Benchers make their contributions. I hope that hon. Members will reduce their contributions, so that more of them can catch my eye. I call Mr. Graham Stringer.

Graham Stringer: Thank you, Madam Deputy Speaker. I will try to limit my remarks, although one could easily take the rest of the time available to go through the issues. A number of hon. Members have said that there are lessons to be learned from the financial fiasco. The real tragedy is that the lessons were known and talked about right at the beginning, when PPP was first considered. Before I come on to those lessons, let me say that my position is that if capital is scarce, and if one can transfer risk, fine: introduce PPP, but make it transparent, know what is going on, and make sure that it is the vehicle that works best. The same goes for the public sector: when it is used, one should make sure that it is the best vehicle for the occasion.
	On 15 July 1998 and 12 July 2000—right at the start of the process, when PPP was being considered—the Select Committee on the Environment, Transport and the Regions asked all the questions that appear in the recommendations in the Transport Committee's January report. We said that risk must be transferred, that there must be a process for resolving disputes, that the amount spent on consultants must be limited, that there must be an arbiter who can take action, and that the infrastructure companies should not be able to renegotiate their contracts. Those are all issues that came up when we discovered that the process had been a disaster.
	What was the Treasury's response? Ministers refused to come before the Select Committee to discuss the issue and refused to release the PricewaterhouseCoopers report on what went on so that it could be properly assessed. If the Treasury had listened to the recommendations, a better method of financing the much needed improvements to the tube may well have been used.

Kelvin Hopkins: I agree with everything that my hon. Friend is saying, but does he accept that when it comes to vital national institutions such as our railway system and the transport system for our capital, risk is never transferred? It is always ultimately with the Government.

Graham Stringer: Experience shows that my hon. Friend is right. That was the experience of Railtrack and of Metronet. I am a broad-minded person and I think all issues and processes should be looked at, but it would be surprising to find a vehicle with a major national asset where the risk could be transferred.
	I attend many Select Committees and have been doing so for a long time. Sometimes they can be tedious, but the hearings that we had in the Transport Committee on 17 October and 9 November were shocking, startling and in some ways exciting. It was like listening to a case involving embezzlers and fraudsters being described and knowing that they had got away with it. It was an extraordinary process. If Tony Soprano or his ilk in New Jersey knew what was going on with Metronet, they would have left New Jersey and come over to London, where they could have given advice and got hundreds of millions of pounds, risk free. It is an amazing story.
	Tube Lines has been mentioned as being better than Metronet. It is undoubtedly better than Metronet, but it is far from perfect. There were problems with the improvements on the Northern Line. There is good management there, but when we look at the basic assessment of the financing, even of Tube Lines, and then look at the public sector comparator and read what the National Audit Office said about public sector comparators, which is the basis that shows that these schemes would be more profitable, we find that the NAO backs away and says, "These comparators are so subject to the assessment of risk that you can't really judge them". That is a way of saying, " There is a fiddle factor in there that we cannot assess, and the experience is that they probably won't save the money that you expect."
	With reference to the financing of Tube Lines, where much of the finance was guaranteed because it could not be obtained from the markets, what happened as soon as Tube Lines got the contract? It refinanced on the open market, which was an indication that it could have been financed at a better rate and that what was driving the process, as a number of my hon. Friends said, is ideology. Tube Lines also had a much higher materiality threshold. We heard that no risk was transferred, and that 95 per cent. of the money was secured; not only 95 per cent. but an extra £500 million—I am talking about the consultants—on the cost of borrowing, so there was no risk to the lenders. Those who would normally be expected to exert pressure were exerting no pressure at all.
	The results on the ground—my hon. Friend the Member for Liverpool, Riverside (Mrs. Ellman) referred to some of these—were that on the Metronet surface lines, 10 out of 18 stations were done. Instead of costing £2 million each, they cost £7.5 million each. On the other Metronet contract, four stations out of 17 were done. Effectively, between two and four stations were paid for and only one was delivered. That is the story that we heard. Although it is difficult to know exactly how much money was overspent, it looks as though it was £1 billion. Nobody can assess it because the funding was available and it is not yet known what the cost was.
	As I said, there was no pressure from the bankers because they had the money. Either it was secured or they got extra money for what they were doing. They did not put any extra pressure on. One would normally expect the owners of equity to want to know what was happening with their money, but this is where the real corruption in the Metronet contract comes. The people who were the equity owners and who had £350 million at risk were effectively paying themselves to do the work at those extraordinary prices. It is easy, isn't it? One of the companies—Bombardier, for example—says, "There's my £70 million. I will overprice this contract at twice the rate. I'm already expecting 20 per cent. return on the capital, so I'll get my money back very quickly indeed." When the Secretary of State gave evidence to the Select Committee, I told her that
	"real corruption has gone on."
	She said:
	"I have no evidence to suggest there was corruption."
	There is direct evidence of corruption. Those people paid themselves out of public money to do less work than they should have done while taking no risk whatsoever.
	The other pressure that normally applies to people who are building things comes from clients, but London Underground was kept out of the matter. Metronet would not tell London Underground what was going on, and the contractors would not tell it what was going on, which was an extraordinary situation. We asked Mr. Pimlott, who was chairman of Metronet for a period, why he did not stop paying the contractors, who were effectively his fellow members on the board, ridiculous sums of money. He said that when he made that suggestion he was threatened with legal action by other members of the board. The story is extraordinary.
	If the scheme were publicly funded, there would be direct lines of accountability, and if it were a private sector scheme, the private sector would take the risk and the loss, but we have neither public accountability nor risk. The Mayor is not responsible—he was against the scheme from the beginning. The Government say that they are not responsible in a direct sense, although pressure from the Treasury undoubtedly caused the situation. The companies have walked away with a great deal of money, so they are not responsible. When the Secretary of State was asked what she thought, who was responsible and what should happen, which might have involved an inquiry or someone having to go, she said this about the infracos:
	"I do not think that anyone should underestimate the impact on their reputations."
	On 6 March,  The Guardian stated that Balfour Beatty, which was one of the bad five in this case, had reported a 48 per cent. rise in profits and that it was on the verge of signing a new deal on the underground to carry on doing the work for which it has already ripped off the public sector. If that is not a scandal and corruption, I do not know what is and words have lost their meaning.
	What should we do? There should clearly be a public inquiry, because there is no accountability. Who has suffered? We do not know exactly because we do not know the cost. In the end, however, the fare payer will pay and passengers will suffer. For example, Transport for London has indicated that it may not be able to fit cooling systems on the tube. The taxpayer will pay.
	Finally—I care about this a lot—when huge expenditure achieves a fraction of what it should produce, it is not only the taxpayer who is affected, because in relative terms there has been a bigger increase in expenditure on transport in the south-east and London than in the regions, so the regions have suffered. The deal has been bad for everybody, and the lessons should have been learned 10 years ago. I hope that we never go into another opaque scheme in which no risk is transferred. The scheme has been bad for the Government's reputation. Ken Livingstone was right and the then Chancellor of the Exchequer was wrong.

Susan Kramer: At the time of the PPP, I was on the board of Transport for London. I was a virulent opponent of the PPP, which I fought tooth and nail.
	I will not repeat the comments that have been made already, but I will try to add to them, because the issue of lessons learned is important. I hope that the Treasury is listening, because it carries a large part of the responsibility for how the negotiations were handled and for the consequences for London's transport system. The whole PPP negotiation was done in a very ideological context. The hon. Member for Leyton and Wanstead (Harry Cohen) was right; the Conservatives had taken the position that the PPP did not go far enough—

Justine Greening: indicated dissent.

Susan Kramer: The hon. Lady shakes her head, but I stood on a platform day in, day out with the Conservative mayoral candidate in many venues; I can say that the Conservative party was seeking total privatisation as an answer.
	Ken Livingstone had in this House voted twice for the PPP; only later was he converted to the idea that it was a flawed way to manage the future funding and structure of the tube. I am glad that he was converted. In the end, the struggle became one between London and the Treasury, and I was glad to be part of it.
	The ideology set a dangerous context. It created an environment in which flawed decision making took place. Ideology overrode common sense and clear, analytical thinking. First, there was no asset register. Teams were trying to negotiate the upgrade of a system when they had no idea of its underlying condition. That automatically meant that there was likely to be a disaster, no matter what the outcome. How does one get value for money in such circumstances?
	Then there was the negotiating team. I do not want to point fingers at very fine individuals, but put a fine individual in the wrong place and there is not a successful outcome. All the bidders—not just the successful bidders, Tube Lines and Metronet, but all the original ones—made sure that on their teams were world-class negotiators, whose skill and focus was to negotiate procurement contracts. The team that represented TfL—it was only nominally a TfL team; essentially, it was a Treasury-driven team—was largely made up of and driven by people with good academic and consulting backgrounds. Their skill set was wrong for taking on the kind of hard-nosed challenge involved in bids for which large amounts of money are at stake.
	The consultants have been mentioned; the Treasury and the Government will have to think through the selection of consultants far more. The contract depended on successful risk transfer. One cannot discuss such a thing with people from investment banks. Such people know how to do deals; they are not part of organisations that take, carry and hold risk. They therefore do not understand risk transfer, and the same applies to consultants who come out of the various accounting firms. Such people have the wrong skill set—the Government were told that over and again, but never listened.

Kelvin Hopkins: The hon. Lady is suggesting that the Government had weak negotiators on their side. If they had had tough negotiators, as they should have, would the privateers not have walked away because they would not have been able to make any money and the risk would have transferred to them? Did they stay in only because they knew that they could make cash and eventually walk away?

Susan Kramer: The structure was fundamentally flawed. If we negotiate with the private sector, we should be aware that it has a duty to its shareholders to get the best from any negotiation. The team that I mentioned was weak not because the individuals were poor but because they did not have the necessary skill set, experience and capability of being a fair challenge. Such negotiations are a gladiatorial contest, and the skill base has to be there.

Kelvin Hopkins: rose—

Susan Kramer: I must move on, because others want to speak.
	To give a simple example, even the most senior engineers at TfL were consulted only about small aspects of the contracts. The contracts depend totally on engineering requirements—to upgrade track, carry out successful maintenance and rehabilitate stations. The engineers were brought in only on a narrow, need-to-consult basis and that utterly undermined any ability to be effective and powerful in the consultation process. From a very early stage, the negotiation went on to having a single preferred bidder. For a chess player, that would be equivalent to handing over their queen at a very early stage in the game. Once people are dealing with a single preferred bidder, the negotiation goes downhill because there is no ability to have competitive play. That was made clear time and again in the course of this negotiation, and it undermined the ability to move forward.
	Underpinning all this was an assumption that one can handle relationships and build long-term dynamic arrangements through contractual and legal documents. The negotiation led to a series of document exchanges, with 135 documents, 2,800 pages, and constant cross-references—completely unworkable on a day-to-day basis. The fundamental philosophy behind these arrangements was that they would be based on legal and contractual relationships. That has proved to be a flawed concept, and that lesson must be learned by Government.
	Then came the comparison between the PPP and carrying out the work within the public sector—the so-called public sector comparator. I have no ideological objection to using the private sector, but there must be a level playing field in comparing the work of the private sector and delivery from the public sector. I believe—I am working from memory; perhaps Ministers can remind us—that a cost overrun adjustment of 15 per cent., or perhaps 20 per cent., is automatically added to the costs of any work calculated or estimated in the public sector. In addition, the Treasury went to extraordinary lengths to devise a discount rate to come up with net present values to compare between the two potential providers. The discount rate that was used was 8.25 per cent., or something very close to that, while the cost of borrowing with the Treasury at the time was about 3 or 4 per cent. It was an extraordinary number to use. Nobody who looked at it thought that it was in any way fair or rational but that it was selected, just like the cost overrun number, to bias the solution towards the private sector.
	Even that did not get us to a project where one would take the private sector option, so the Treasury came up with one more concept, which was on its website for a while but shortly thereafter abandoned—that of reputational cost, which basically said that if there is major borrowing by a public sector entity, the cost of that somehow reflects the total borrowing capacity of the country as a whole, so there is a pricing impact.
	It took all those factors stacked together to come out with a number that suggested that taking the public-private partnership route made more sense in any kind of financial analysis. It was so artificial, and so clearly structured to achieve a specific end, that it lost all sense of the risk involved and of value for money to the public. We ended up with a procurement that was described by one of my colleagues as one that will be taught in American business schools as course 101 on how not to procure. That is not a situation that the British Government should ever get us into again.
	We have heard about risk transfer. There has been evidence from the very beginning that risk cannot be transferred in this respect. London cannot see its underground network being strained in capacity and coming to a halt. The risk will always end up resting with the public sector, and that notion must be taken fundamentally into its thinking.
	It was evident that the Metronet contract was in trouble almost from day one. In June 2005—there had been many previous comments, but this is the one that I was most easily able to lay my hands on—Bob Kiley gave evidence to the Greater London authority and talked about Metronet's performance as "bordering on disaster". This was a slow train wreck, which people could see happening gradually, but the contractual arrangements made sure that it would not be possible for TfL or anyone else to intervene. The underlying standards embedded in the contract were very much driven by what the banks would finance. The banks were clear that the performance required of the private sector had to be something that a modest company could achieve on a modest day. The targets were low and the mechanisms for intervening were minimal.
	I need to wind up my remarks quickly, so I shall make a couple of further comments; I would love the opportunity to share more of the understanding that we developed of these projects on another occasion. We must have some absolute parameters. Cost must not fall on Londoners, and I hope that we will get that assurance. We must have an understanding of where the Government see the contracts going. Will we be using a concession model, which I would favour over taking the process back in-house? London Overground and docklands light railway are excellent examples. We must know what Londoners will lose in the way of upgrades, such as air conditioning and all of the other plans that were laid out.
	As the Government will be aware, those who opposed the PPP felt that there should be bond issues based on the farebox and on future streams of grants from Government. That concept of financing would have enabled far lower pricing and far more effective systems—splitting the financing from the concession to carry out the work. It would have put the responsibility on the body that would hold it best, and I would like to hear whether the Government will consider moving to that model in their recovery from the Metronet disaster.

Clive Efford: I start by saying how much I regret the fact that the Chair of our Select Committee, my hon. Friend the Member for Crewe and Nantwich (Mrs. Dunwoody), is unable to be here. I wish her all the best, and I hope that she makes a swift recovery and returns to her duties in the House as soon as possible.
	It is inevitable in a debate on the failure of Metronet that everyone will repeat the arguments of 10 years ago, when people were raising questions about the public-private partnership, and they have jumped to the conclusion that the entire PPP has failed. I say to the hon. Member for Lewes (Norman Baker) that if he reads the conclusions of the report, he will find that paragraphs 21 to 24 all refer to severe failures of Metronet and its internal structures, but they do not condemn PPP. We take a strong position on the failures of the part of the PPP that Metronet was involved with, but the Committee is far from saying that PPP is a bad idea. Many of us in this House come from local government, where public-private partnerships are commonplace. It would be a foolish position to take to say that we were flatly opposed to PPP.
	The hon. Member for Hammersmith and Fulham (Mr. Hands) is unfortunately no longer in his place. I used to share my office with the previous Member for that constituency when it was a Labour seat, and I have to say that he made a lot more sense. At the 1997 general election, the Conservatives' manifesto stated unequivocally that they would introduce proposals to privatise the London Underground. A little later, in 2000, their mayoral candidate, Steve Norris, was cited in  The Times on 29 January:
	"Steven Norris, the Tory candidate for London mayor, is to support Labour proposals for a public-private partnership for the London Underground."
	The article went on to say:
	"Campaign aides yesterday made clear that the plans had been drawn up with the backing of William Hague"—
	some echoes there of what happened to the Liberal party last week. Only a few months later, the hon. Member for Poole (Mr. Syms) reverted to Conservative old ways and said:
	"We want fully to privatise the underground".—[ Official Report, 6 November 2000; Vol. 356, c.107.]
	Londoners are clearly not protected by Conservative proposals. Conservatives would seek to use the private sector in the PPP in future. Their mayoral candidate already has a hole of £100 million in his budget, so Londoners know what to expect should they elect him.

Stephen Hammond: The calculation was redone at the weekend and the figure of £100 million constitutes a false allegation. How did the hon. Gentleman reach that figure, against the calculation by independent people, which shows that the figure is about £10 million not £100 million?

Clive Efford: I would take the hon. Gentleman through the miscalculations—[Hon. Members: "Go on!"] If I am to allow the hon. Member for Putney (Justine Greening) to get in, I cannot go down that route.
	We are considering the failure of the unbridled privatisation of the London underground. Tube Lines has a completely different internal structure, containing incentives and higher materialisation thresholds, which encourage it to incentivise, innovate and keep its costs down. Metronet was a cash cow, on which stakeholders and shareholders fed until there was nothing left. It was unable to impose any form of accountability or efficiency on the stakeholders and shareholders. Moneylenders to Metronet did not impose any restrictions and the whole edifice came tumbling down. We finished up with 50 delayed station upgrades and no risk transfer from the public to the private sector.
	In the short time available, I want to emphasise to the Government that there are lessons to be learned, as everybody has said. We must not repeat the mistakes that we made in the run-up to PPP 10 years ago. The London underground needs stability and time to plan ahead. We cannot enter into another enforced PPP, whereby a private sector partner is levered in to take over the contracts that London Underground currently runs. The administrators have attempted to introduce the private sector and they have failed. Indeed, they said that pursuing that would be a waste of public money. We need London Underground to retain the management of Metronet's contracts and a period of stability for the benefit of Londoners. Metronet has let Londoners down and we must not put another Metronet in place to repeat that exercise.

Justine Greening: I am pleased to contribute to the debate because the performance of the District line and the tube generally constitutes a major part of my constituents' lives. If they have a bad time getting to work on the tube, they generally have a bad day. The debate is important for Londoners because it is about their day-to-day quality of life in this city.
	I welcome the report. When Metronet collapsed, a full inquiry was needed and the report makes some valid comments about and has some valid insights into what happened. I was especially struck by the comments of Tony Travers of the London School of Economics, which appear on page 14. He referred to the £5 billion to £7.5 billion spent on the tube network in the past five years, saying that it
	"is a huge amount of money to have delivered—at the very best—a train service that's overall no different"
	from
	"when we began."
	My constituents, who have to use the tube every day, would agree with that.
	I shall spend a couple of minutes considering our experience locally. On our local District line, we need a more reliable service, more capacity and signalling. That was in the PPP contract for Metronet. The work was not going to happen overnight, but it was initially pencilled in for, not today or tomorrow but probably 2012, perhaps lasting until 2018. My constituents are now concerned about the major question mark over those promised performance improvements that the failure of the PPP contract has raised.
	As my hon. Friend the Member for Hammersmith and Fulham (Mr. Hands) pointed out, the backdrop to that is people doing what the Mayor wants them to do—using the tube to get to work every day. As I said in an intervention, in the past three years we have seen the equivalent of three trains-worth of extra people using the Wimbledon branch of the District line every day. That is one extra tube-worth of people every year. Our concern is not that the planned improvements will not happen, but that when they do happen, they will merely catch up with the extra capacity that we needed anyway, so we will not see much of an improvement.
	Our daily experience is one of being crushed on overcrowded tubes—certainly not pleasant at any time of the year, particularly not in the summer—delays, being stuck in tunnels, being unable to contact people when late for meetings at work and long waits at Earl's Court station coming home, with thousands of other people waiting for the occasional Wimbledon-bound train finally to arrive. My constituents find it particularly galling that they are never asked what they think about the service, but treated merely as people to be shunted around on it. The report does not cover this, but London Underground has never asked them their views following the Metronet collapse.
	I felt so frustrated by the lack of feedback from customers that I set up what I call my MP textline, so that people can rant to me on their mobiles. They sign up on my website, get a mobile number and can text me when services are poor.

Kelvin Hopkins: Is not what the hon. Lady describing a demonstration that the privateers are simply interested in making money and have no care whatever for the passengers paying their fares or the public purse?

Justine Greening: That is one way of looking at the situation, but as we have discussed, what is interesting about the report is the contrast between the performance of Tube Lines, which appears to have prospered in its contract, and Metronet. The hon. Member for Eltham (Clive Efford) mentioned the materiality thresholds in connection with the risk borne by the different PPP contracts. With hindsight, it seems that they had a large impact. We shall have to wait and see whether Tube Lines will continue to prosper, but the one thing that we do know is that Metronet has failed. As I said, the report set out some interesting hypotheses on that.
	My MP textline is frequently used by people to rant. Here are some typical messages that I can read out in the Chamber:
	"To justine. 18 oct. Arrived on southfields platform 07.33, long wait for train. Sardines! Many people unable to get on. Arrive earls court 7.58. A typical journey on the district line."
	Here is another:
	"Took 30 mins to get from Wimbledon to Southfields on District Line last night"—
	a journey that normally takes about four minutes—
	"because of signal failure. This always seems to happen when it rains hard!"
	I could continue for a long time with messages that I have received on my textline over the past few months.
	There is no doubt that Metronet's collapse has had a profound effect on my constituents. We are concerned about delays to improvements to East Putney station and to lifts being installed in Southfields station. In relation to accessibility, I am particularly concerned about the impact of Metronet's failure on those who are less able to get into London to work, such as people on incapacity benefit.
	Finally, who is culpable? A lot of people are culpable. The Mayor is culpable, because his attitude from the word go was that he was not interested in the PPP being successful. My constituents and many others around London who are reliant on the PPP delivering, however badly it was structured, have been let down by various parties, including the Mayor, who have not done their best to make it work.
	Metronet is culpable. When things started to go wrong it simply did not react, and much of that is contained in the report. The way in which London Underground and Metronet worked together when things were clearly going wrong was simply unacceptable.
	Finally, as we have mentioned already tonight, the Prime Minister structured the poor contract, within which the PPP collapsed. I have no doubt that my constituents will remember that fact.
	Whatever the failings, the people who are left suffering—I will probably be one of them tonight, when I have to use the District line to get home—are my constituents, and there is a real danger that, if we do not secure improvements, through a PPP contract or any other means of attracting investment, London's underground will start to be a serious drag on London's economy. I am concerned that the quality of life of this great city, which we all love living in, will continue to be pulled down by a daily experience of travelling to work that, for many people, is simply becoming unacceptable.

Nick Raynsford: First, I draw attention to my interest as declared in the Register of Members' Interests.
	I rise to speak to try to bring a degree of balance back to a debate that, to me, has been disappointing, first, because of a tendency to go from the particular to the general and to assume that the PPP is universally unsatisfactory because of the failure of Metronet, and, secondly, because of a lack of realism in some respects about the context in which the PPP was developed.
	The hon. Member for Richmond Park (Susan Kramer) made an interesting series of observations on the negotiation of the PPP, many of which I would concur with, but she did not give us the background of the procurement of the Jubilee line, which was in many respects one of the most depressing and unsatisfactory procurement exercises that we have ever seen. The Jubilee line has a lot of things going for it. I take particular interest in it because it is my constituency's only contact with the London underground. The line was well designed and there are some very fine stations—we have one here at Westminster that many hon. Members use every day and can admire—but the procurement was fundamentally unsatisfactory. The scheme was seriously delayed and there were massive cost overruns—approximately £1.5 billion.

Susan Kramer: Will the right hon. Gentleman give way?

Nick Raynsford: I will give way very briefly, but I am time-limited.

Susan Kramer: Does the right hon. Gentleman remember that those who wanted a public sector option also said that good, high-quality management needed to be brought into London Underground?

Nick Raynsford: I absolutely agree, and I would only disagree because the hon. Lady berated the public sector comparator—the assumption of a 15 per cent. cost overrun. Would that it had been only 15 per cent. On the Jubilee line, the cost overrun was massively greater than 15 per cent. and it was therefore absolutely right for the Government to look for alternatives that would bring in good management and ensure that the very considerable backlog of repairs would be dealt with efficiently.
	Greenwich and Woolwich has only one link into the underground service—the Jubilee line. We can look at the performance of Tube Lines in the past five years and see a number of areas where very considerable improvements have been made. On completion, the Jubilee line lacked the signalling system that had been part of the original specification and would have allowed a much more frequent service than we have enjoyed. The line opened with a less than satisfactory signalling system, which has been the subject of a great deal of work and will have to be replaced in another year's time. Capacity was not up to the demand. Not surprisingly, the only link into the underground from Greenwich is hugely popular and there is very serious overcrowding.
	By 2005, we had seen the first of the upgrades conducted by Tube Lines: the extension of the seventh carriage, to join the six carriages on the original specification, and improvements in the underground access to North Greenwich station. That improvement has already been entirely absorbed by further demand. Therefore, a further upgrade will be required next year, to improve the signalling system and make good the defects of the original scheme, which was specified according to the formula that some of my hon. Friends have been arguing for: public sector control. We should not forget that the failure on some of those previous orthodox contracts was the background that led to the view that we should look for alternatives, such as the PPP.
	I am pleased to say that when the signalling transformation is carried out next year—I am confident from my discussions with Tube Lines that it fully understands what is required, and I hope that it will be as efficient in doing that as it was with the upgrade of 2005, which was conducted in an exemplary fashion and completed over the Christmas holiday period, involving minimal disruption to the public—we will see an upgraded line with 40 per cent. more capacity than it had in 2003 when the PPP was introduced. I regard that as a rather important achievement.
	I urge all Members, and particularly my right hon. Friends on the Government Front Bench, to take a balanced view. While rightly learning the lessons from Metronet's failure—I make no excuses for its lamentable failure—they must recognise that other parts of the tube service have had a different experience. From our perspective in Greenwich and Woolwich, the improvements in the Jubilee line over the past five years are enormously welcome and I hope that they can be sustained.

Stephen Hammond: The Metronet contract was supposed to deliver 35 station upgrades in three years: it delivered 14. It was supposed to deliver them at a cost of £2 million: delivery actually cost £7.5 million. It was supposed to deliver an extensive programme of track renewals: only 65 per cent. of the work was completed. That lamentable failure is clear from the Select Committee report.
	This evening's debate was ably opened by the hon. Member for Liverpool, Riverside (Mrs. Ellman), who had the unenviable job of substituting for the hon. Member for Crewe and Nantwich (Mrs. Dunwoody). I am sure that we all wish her well.
	I have been fascinated by all the contributions. Clearly, we are not here to discuss the basic structure of public-private partnerships. Rather, our debate is about the failed Metronet contract, the awarding of the contract in particular circumstances, its operation and its failure to deliver.
	As the right hon. Member for Greenwich and Woolwich (Mr. Raynsford) pointed out, the basic structure of PPP or the private finance initiative is that the private sector can undertake infrastructural investment on behalf of the public sector. The exact structuring of the contracts will differ from project to project, but that structuring should transfer risk from the public to the private sector. The failure to do so in this case is a failure of this contract, not a failure of the general. PPP contracts allow the public sector to access facilities—for example, world-class project management and engineering talent—that would not otherwise be available to it; value for money can be guaranteed; and there can be innovation in working practices.
	The basic structure of the PPP is that the private sector delivers the best for the public sector when the private sector is told what outputs to deliver and decides how they are to be delivered. That is at the heart of tonight's debate and at the heart of the failure. It is clear that this PPP did not follow that stricture from the beginning.
	In 1998, the London Transport board had been informed of the need to investigate alternative methods of financing the London underground, including a future investment programme for the next 25 years. It is worth remembering that at that stage the whole bus system was running at break even and the whole of the London transport system was costing the taxpayer only £130 million. The bus network costs a net £700 million now and a total cost of more than £2 billion.

Kelvin Hopkins: The hon. Gentleman began by saying what a disaster PPP has been, so I am astonished that he is now saying that it is basically sound. The increase in costs that he mentions coincides exactly with the period of privatisation of both buses and trains.

Stephen Hammond: If the hon. Gentleman will let me continue, I am coming on to that. I am saying that the principle is sound, but that the contract was at fault. I will come on to re-emphasise that, and it is exactly what the Select Committee report makes clear.
	The hon. Member for Richmond Park (Susan Kramer) will remember that in 1998 the board and its advisers, KPMG and Lazard, evaluated 15 different financing options. The first was to keep the whole operation in the public sector and use London Transport-backed corporate bonds, secured on future cash flows, to finance the capital investment. The second was to sell a 25-year franchise to the private sector to operate the whole system and to carry out the investment required. Fare levels and service frequency and quality were also prescribed. I think she will confirm that the London Transport board and its advisers suggested that if option 2 had been taken, it would have generated £2 billion for the public purse.
	The board presented the Treasury and the Department for Transport with 15 different options. The Treasury started to exert influence for its favoured option. The Treasury Committee in 2001 noted that there was the
	"excessive influence of the Treasury...to plump for a PPP scheme for London Underground to the exclusion of all other options."
	It further stated that
	"the Treasury...has begun to exert too much influence over policy areas which are properly the business of other departments. This is not necessarily in the best interests of the Treasury or the Government as a whole."
	What was clear in the end was that out of those 15 options, the 14th best option was selected. The Government at the time said that the PPP would realise more than £16 billion and save more than £4 billion. The London Transport board and its advisers said that on a discounted cash-flow basis, the difference between options 1 and 2 and the 14th was a £3 billion cost to the taxpayer. Let us be clear about this: there was a cost to the taxpayer that could have been avoided right at the outset of the contract. It is also true, as the hon. Member for Lewes (Norman Baker) noted, that there was a bill of £500 million for lawyers. Mr. Travers, in his evidence to the Committee, said that the
	"PPP is virtually impossible to understand"
	and that the Government had been naive in believing that nothing could go wrong with the contracts.
	At the very heart of what we are considering—at the very heart of the report—is the fact that the PPP was imposed on London Transport against the advice of the board and the financial advisers. It was the man who was in charge of the Treasury at the time who is culpable and responsible for that. This month's issue of  Rail Professional magazine says that
	"the unravelling of the PPP at such expense to the tax payer is seen as a serious blow to"
	the Prime Minister. The Prime Minister was responsible and is responsible. In the end, the total cost of the debacle will be much closer to £4 billion.
	If the imposition of the structure of the PPP is one of the major causal factors, why did Metronet itself fail? In evidence to the Committee, Mr. Pimlott said that
	"it ran out of cash because it spent too much money",
	and Mr. O'Toole answered, "Metronet lacked control." Both of those may be correct, but they are not exactly insightful or particularly helpful.
	As many hon. Members said, there is a clear difference between the two contracts and the two companies delivering them. The significant problem with Metronet was the tied supply chain. The same parent companies of Metronet were allowed to be organised into another company, Trans4M. It supplied the station upgrades and delivered only 40 per cent. of its obligations. What is clearly at the heart of the failure of the contract was conceded by Mr. Pimlott when he said that
	"the contractual arrangements were a very negative factor"
	and that
	"it was a contract which gave Metronet very little in the way of leverage."
	It was a building-type contract, not a PPP output-based contract. There was an issue that the tied supply chain was a major contributing factor to the failure of Metronet. It was unable to penalise underperformance and lack of delivery and could not hold back funds. The hon. Member for Manchester, Blackley (Graham Stringer) made the point that Mr. Pimlott said in his evidence to the Committee that when he tried to exercise that influence, he was threatened with litigation. Of course, that would be so, given that the contract was structured in that way. However, it is clear that Metronet's shareholders, along with the Government, are at the heart of its failure. Responsibility for the cost overruns and the lack of delivery to Transport for London lies principally with the management and shareholders. But if the tied supply chain is a problem for Metronet, another problem for it is that, as it argued to the Committee with some pertinence, part of its overspend and lack of delivery to Transport for London was due to TfL itself.
	If the Mayor can be credited with having opposed TfL at the beginning, he can certainly be culpable for the way in which he acted in the operation of the Metronet contract. The Mayor and Transport for London—the Mayor tells everyone that they are interchangeable—were guilty of continual specification change. Mr. Pimlott gave the example of the upgrade of Lancaster Gate station. Metronet was asked to repaint it three times in different shades of grey because the board of Transport for London could not make up its mind. Mr. Lezala, Metronet's chief executive, said that that was indicative of London Underground's wasteful approach. He also said
	"there are lots of examples... where we are spending twice as much as planned."

Harry Cohen: The hon. Gentleman is making up history, or giving us his own version of it. The PPP independent arbitrator blamed Metronet, not Ken Livingstone or the docklands light railway, for the cost overruns.

Stephen Hammond: Let us be accurate. The arbitrator split the costs, although I agree that he moved the balance of the costs towards Metronet. Metronet claimed £992 million; his view was that an efficient company might have required between £140 million and £470 million. The version of the truth that the hon. Gentleman has just given is not entirely accurate either. There was a splitting of the responsibility and the blame, and it seems to me that Transport for London was happy to play Russian roulette with taxpayers' money. It knew that if the arbitrator did not support its position, Metronet would not bear the costs and the taxpayer would. It is the fault of Transport for London, the Mayor and Metronet that an extraordinary review did not take place earlier. Transport for London and the Mayor can also be blamed for stating that there was no room for negotiation and no chance of a negotiated settlement. It is clear that the extraordinary review, had it occurred earlier, would have involved less cost to Londoners and to the overall public purse.

Susan Kramer: Is the hon. Gentleman aware that the contracts did not give Transport for London power to give extensive specifications and changes of specification? Perhaps such measures can be proposed, but they must be accepted by the infraco partner.

Stephen Hammond: It is clear to me that at the heart of the problem is an ill judged—on both sides—lack of understanding of what the contract meant. Metronet believed that it was providing a contract that was output based, while Transport for London believed that it was inheriting a fixed-price contract allowing it to respecify continually. The contract failed because Metronet spent too much money and did not deliver. Part of that was undoubtedly due to the tied supply chain, but another factor was the conflict between Transport for London and Metronet.
	Metronet went into administration on 18 July last year, which has been described by the Secretary of State as "a terrible failure". A number of people may think that it is a rather spectacular failure. On 6 February the Secretary of State was forced to admit that the cost of the failure to the taxpayer was £1.7 billion, which was paid to Transport for London to cover the 95 per cent. debt guarantee, and £300 million to cover the costs of administration. Those costs are ongoing.
	I believe that the PPP principle is sound, although it is not always a universal panacea; but it is not the principle that is being debated tonight, and it is not the principle that is under threat from the report. It is a failure of the network and of Metronet's shareholders and management, but it is at heart a failure of the PPP contract that was set up and those who were responsible for that—and the person responsible for that contract was the Prime Minister.

Rosie Winterton: This has been an interesting debate, and I am sure it would have been even more lively if my hon. Friend the Member for Crewe and Nantwich (Mrs. Dunwoody) had been present. We all wish her a speedy recovery, but my hon. Friend the Member for Liverpool, Riverside (Mrs. Ellman) did a very good job in leading off the debate in her place. I wish to reiterate what my right hon. Friend the Secretary of State for Transport said to the Transport Committee in November last year: she welcomed the Committee's consideration of the tube public-private contracts and, in particular, of the background to the failure of Metronet. My hon. Friend the Member for Liverpool, Riverside set out the Committee's views and asked that the Government learn lessons from the failure of Metronet. I assure her that it is of great importance to the Government that we understand why Metronet has failed so we can learn the appropriate lessons for the future.
	As many Members have said, the underground is central to London's economy, carrying approximately the same number of passengers per day as the entire heavy rail network of Great Britain. The hon. Member for Hammersmith and Fulham (Mr. Hands) talked about the increase in demand. That is true: since 1993, there has been approximately a 65 per cent. increase in people travelling on the underground, and London Underground expects demand to grow to 1.5 billion journeys a year by 2020.
	When this Government came to power in 1997, the underground had suffered from decades of under-investment. As my right hon. Friend the Member for Greenwich and Woolwich (Mr. Raynsford) said, improvements to the Central and Jubilee lines had run both late and significantly over-budget. Given that backdrop, it was right that a Government committed to sustained investment in the tube should ask what structure was most appropriate to ensure successful delivery of the infrastructure work for passengers, at best value to all taxpayers. In arriving at their solution, the Government were guided by what had been learnt about effective public-private partnerships in others sectors and in other countries across the world.
	As the hon. Member for Wimbledon (Stephen Hammond) said, at the core of the tube PPP was the desire for the parties operating, maintaining and improving London's underground network to focus on what they did best. That meant London Underground focusing on operating and setting strategic priorities for the network's development and bringing in private sector project managers to oversee the delivery of essential maintenance and upgrades, with appropriate transfer of risk.
	Pointing to the Transport Committee report, the hon. Member for Lewes (Norman Baker) and my hon. Friend the Member for Manchester, Blackley (Graham Stringer) asserted that those principles were not tested. However, I can assure the House that those principles were rigorously tested as the PPP proposals developed. Considerable time and effort were expended in understanding the comparative value for money of the PPP versus conventional public sector-led procurement. That work, based on the public sector comparator, was independently scrutinised by KPMG and Ernst and Young, and subsequently the National Audit Office. Both found the methodology to be robust and fit for purpose.
	The Government certainly recognise that Metronet has failed and that that has had a very real impact on the underground network and on passengers. They were, however, the corporate failings of Metronet and not failings of the entire PPP concept, as my hon. Friend the Member for Eltham (Clive Efford) said. Tim O'Toole, the managing director of London Underground, stated in July 2007:
	"This is more about Metronet's structure than it is about the PPP."
	Metronet did not deliver satisfactorily on its track renewal and station upgrade contracts, and that failure to control costs is what ultimately led to its collapse.

Greg Hands: The Minister is also Minister for Yorkshire and the Humber. Given the seriousness of the Metronet situation, will she tell us what discussions, if any, the Prime Minister has had with the Mayor of London in order to find a solution?

Rosie Winterton: I shall discuss the way forward, but I wish to emphasise that the Government are determined to learn the lessons of Metronet's failure.

Norman Baker: The Minister rightly says that Metronet was a failure, but she does not seem to accept the Treasury's failure. What lessons has it learned on letting these contracts?

Rosie Winterton: I wish to discuss the background to the original thinking on PPP and to emphasise that the House should not lose sight of the wider context of the tube PPPs. The hon. Gentleman talks about the Treasury, but it is worth while remembering that the PPP secured significant additional investment at a time of many competing priorities for the public purse, as my right hon. Friend the Member for Greenwich and Woolwich said. The hon. Member for Hammersmith and Fulham would not answer questions about his party's position on privatisation at that time, as my hon. Friend the Member for Eltham said, and I noticed that the hon. Member for Wimbledon did not try to resile from the comments that he made.
	It is important to remember that the London Underground PPPs are delivering performance benefits against the background of continuing growth in demand. The hon. Member for Putney (Justine Greening) said that no improvement had been made to the underground, but that is not true. Some 247 stations are programmed to be modernised or refurbished by 2010-11, and work on 91 stations has been completed; Tube Lines was expected to deliver 47 stations by the end of August 2007 and has done so; more than 115 km of track has been renewed, with delivery on some lines ahead of schedule; a fifth train is now in service on the Waterloo and City line during peak periods; a £40 million upgrade on that line has improved reliability and reduced journey times; the extension of the Piccadilly line to Heathrow terminal 5 has been completed; and work on a new signalling system on the Northern line is ahead of the contract date.
	As my right hon. Friend the Member for Greenwich and Woolwich, my hon. Friend the Member for Eltham and the hon. Member for Putney said, and as Terry Morgan stressed in his evidence, Tube Lines has delivered the 47 stations required by the end of August and is delivering the required increase in Jubilee line capacity, and not a single programme is running late. That shows that with the right approach to project management and a rigorous pursuit of efficiency, the PPP delivers.
	Having said that, major works remain outstanding. My hon. Friend the Member for Leyton and Wanstead (Harry Cohen) asked about those. The PPP contracts were always structured so that major capacity improvements to the network were not going to begin immediately. Such major capital works demanded careful planning and preparation, and were scheduled to deliver significant capacity improvements in the PPP's second period—between 2010 and 2017. That schedule remains for Tube Lines, and I can assure him that London Underground will work to ensure that Metronet's work can be put back on track as quickly as possible.
	Having set out the improvements made to the network, I reiterate that lessons must be learned from Metronet's failure if we are to secure continued improvements for passengers in the future. The hon. Member for Wimbledon and my hon. Friend the Member for Manchester, Blackley raised the issue of tied supply changes. Those are a common feature of PFI projects in the UK and in international project finance projects, but they demand effective governance. As many hon. Members have pointed out, when Metronet ran into difficulties, it did not have the appropriate corporate governance in place to resolve the situation at a sufficiently early stage. Only when the scale of the problems facing Metronet became apparent to its individual shareholders did serious attempts to restructure the business begin. Ultimately, the changes were then too little and too late to avert the company's collapse.
	My hon. Friends the Members for Liverpool, Riverside and for Manchester, Blackley referred to the level of risk transfer to the private sector. At least three of Metronet's shareholding companies have already written off more than £300 million due to the failure of Metronet. Those losses are significant, but I do not dispute the fact that, as my hon. Friend the Member for Leyton and Wanstead and the hon. Member for Lewes pointed out, they failed to motivate Metronet's shareholders to address the company's failings sufficiently early, earnestly or effectively. I assure the House that we will want to ensure that risk transfer is appropriate, meaningful and effective in future contracting arrangements.
	However, I remind the House that we are in a very different place from when the contracts were first awarded. The hon. Member for Richmond Park (Susan Kramer) pointed out the difficulty of knowing what assets were available. That is true, but Transport for London and London Underground now have a clearer understanding of the condition of the assets, so they should be able to bring more clarity to the specification and pricing of the contracts. The hon. Lady and the hon. Member for Lewes raised the issue of consultancy. I think that the hon. Lady was questioning not the need for consultants, but the need for different types of consultants.
	My hon. Friend the Member for Liverpool, Riverside asked when Metronet will come out of administration. It is for the administrator for Metronet to decide how and when the Metronet business can be transferred out of administration. I can assure her that the Government stand ready to support the early transfer of Metronet's businesses, to ensure that they can be put on a stable footing as soon as possible.
	Several hon. Members asked about the next steps. I can tell the House that a joint steering committee, with officials from Transport for London, London Underground, the Treasury and Partnerships UK, has been set up to develop options for the long-term structure of the former Metronet businesses. It will report to the Secretary of State for Transport and the Mayor of London by summer 2008.
	The hon. Member for Richmond Park asked about the consideration of alternatives, and the Government are working closely with Transport for London and London Underground to form a view on the best structure for delivering improvements on the network. We have made no presumption about the right structure, nor do we have a predetermined view on the best financing structures to support delivery. However, in making its recommendations, the committee will consider all of the lessons learned from the Metronet PPP contracts, including the Transport Committee's views and today's very helpful debate.
	I reiterate that the failure of the Metronet PPPs is a corporate failure, not a failure of the PPP contracts. However, we are working to understand the reasons for this failure and will ensure that the lessons learned from Metronet are understood and incorporated in any proposed long-term structure. That is a significant challenge, but my Department, Transport for London and London Underground are committed to ensuring the delivery of those essential improvements to the tube network is put back on track as soon as possible—
	 It being Ten o'clock, Mr. Speaker  proceeded to put forthwith the deferred Questions relating to Estimates, pursuant to Standing Order No. 54(4) and (5) (Consideration of estimates).

SUPPLEMENTARY ESTIMATES, 2007-08

HM Treasury
	 Resolved,
	That, for the year ending with 31st March 2008, for expenditure by HM Treasury—
	(1) further resources, not exceeding £7,092,000, be authorised for use as set out in HC 366,
	(2) a further sum, not exceeding £11,841,000, be granted to Her Majesty out of the Consolidated Fund to meet the costs as so set out, and
	(3) limits as so set out be set on appropriations in aid.
	Department for Transport
	 Resolved,
	That, for the year ending with 31st March 2008, for expenditure by the Department for Transport—
	(1) further resources, not exceeding £2,059,473,000, be authorised for use as set out in HC 273,
	(2) a further sum, not exceeding £1,859,129,000, be granted to Her Majesty out of the Consolidated Fund to meet the costs as so set out, and
	(3) limits as so set out be set on appropriations in aid.
	Mr. Speaker  then proceeded to put forthwith the Questions required to be put, pursuant to Standing Order No. 55 (Questions on voting of estimates, &c.)

ESTIMATES, 2008-09 (NAVY) VOTE A

Resolved,
	That, during the year ending with 31st March 2009, a number not exceeding 41,270 all ranks be maintained for Naval Service and that numbers in the Reserve Naval and Marine Forces be authorised for the purposes of Parts 1, 3, 4 and 5 of the Reserve Forces Act 1996 up to the maximum numbers set out in HC 264 of this Session.

ESTIMATES, 2008-09 (ARMY) VOTE A

Resolved,
	That, during the year ending with 31st March 2009, a number not exceeding 122,870 all ranks be maintained for Army Service and that numbers in the Reserve Land Forces be authorised for the purposes of Parts 1, 3, 4 and 5 of the Reserve Forces Act 1996 up to the maximum numbers set out in HC 264 of this Session.

ESTIMATES, 2008-09 (AIR) VOTE A

Resolved,
	That, during the year ending with 31st March 2009, a number not exceeding 46,130 all ranks be maintained for Air Force Service and that numbers in the Reserve Air Forces be authorised for the purposes of Parts 1, 3, 4 and 5 of the Reserve Forces Act 1996 up to the maximum numbers set out in HC 264 of this Session.

ESTIMATES, EXCESSES, 2006-07

Resolved,
	That, for the year that ended with 31st March 2007—
	(1) resources, not exceeding £38,611,000, be authorised for use to make good excesses of certain resources for defence and civil services as set out in HC 294, and
	(2) limits as so set out be set on appropriations in aid.

SUPPLEMENTARY ESTIMATES, 2007-08

Resolved,
	That, for the year ending with 31st March 2008—
	(1) further resources, not exceeding £14,190,565,000, be authorised for defence and civil services as set out in HC 273 and HC 290,
	(2) a further sum, not exceeding £5,692,926,000, be granted to Her Majesty out of the Consolidated Fund to meet the costs of defence and civil services as so set out, and
	(3) limits as so set out be set on appropriations in aid.
	 Ordered,
	That a Bill be brought in on the foregoing resolutions relating to Supplementary Estimates, 2007-08, and Estimates, Excesses, 2006-07, and the resolutions of 5th December relating to Supplementary and New Estimates 2007-08: And that the Chairman of Ways and Means, Mr. Chancellor of the Exchequer, Yvette Cooper, Jane Kennedy, Angela Eagle and Kitty Ussher do prepare and bring it in.

CONSOLIDATED FUND (APPROPRIATION) BILL

Jane Kennedy accordingly presented a Bill to authorise the use of resources for the service of the years ending with 31st March 2007 and 31st March 2008 and to apply certain sums out of the Consolidated Fund to the service of the year ending with 31st March 2008; and to appropriate the supply authorised in this Session of Parliament for the service of the years ending with 31st March 2007 and 31st March 2008: And the same was read the First time; and ordered to be read a Second time tomorrow, and to be printed [Bill 85].

DELEGATED LEGISLATION

Ordered,
	That the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008, dated 18th February, be referred to a Delegated Legislation Committee. —[Tony Cunningham.]

INTERNATIONAL DEVELOPMENT

Ordered,
	That James Duddridge be discharged from the International Development Committee and Daniel Kawczynski be added.  ——[Rosemary McKenna, on behalf of the Committee of Selection .]

PETITION

Development (Essex)

Bob Spink: I rise to present a petition on behalf of my constituents, who feel that their community is damaged by massive overdevelopment without the initial imposition of infrastructure to meet that development. They are particularly concerned that our community is becoming "flat land" and that the development of massive blocks of flats without facilities for families and for other people in our community, particularly the elderly, is not helpful to our community.
	The petition states:
	The Petition of Mrs Vanda Jimmick, residents of Hadleigh and others
	Declares that Hadleigh, particularly the town shopping centre, should be protected from further overdevelopment, and that they feel the proposed development, at the corner of Oak Road North and London Road, replacing four commercial units with 30 flats and three large commercial units, with totally inadequate parking and access facilities, is environmentally damaging and local public services and road capacity are even now under great strain and unable to absorb more development, and that they feel that Hadleigh is becoming flat-land, and there is too much of this sort of housing provision, which is not suitable for families.
	The Petitioners therefore request that the House of Commons urges the Government to implore the local borough council to reject the development of the corner of Oak Road North and London Road so the community can remain sustainable.
	And the Petitioners remain, etc.
	[P000143]

HARROGATE THEATRE

Motion made, and Question proposed, That this House do now adjourn. —[Mr. Michael Foster.]

Phil Willis: I am extremely grateful for this opportunity to open a short debate on the future of Harrogate theatre. I do so knowing that, although they may not be in the Chamber, dozens of other right hon. and hon. Members share my real concerns about the way Arts Council England and its regional bodies handled the 2008 to 2011 comprehensive spending review settlement.
	Let me say immediately that I recognise the real difficulties Arts Council England faced this year. Budgets were already under severe pressure following the Government's seeming inability to control spending on the forthcoming Olympics. In many ways the arts, which arguably contribute far more to the nation's long-term well-being than four weeks of glory in 2012, have been sacrificed on the altar of illusionary gold medals.
	It is unfortunate that Arts Council England chose this particular period to carry out
	"the most comprehensive review of arts funding"
	in its history, to quote its words. Few would disagree that renewal is essential if a vibrant arts culture is to survive, but the manner in which the change of strategy was planned and executed is unacceptable. For the chairman, Sir Christopher Frayling, to state:
	"We decided at the beginning of the process that we were not just going to be a cashpoint machine with an over-complicated pin number"
	was at best unfortunate, and at worst an arrogant demonstration of ignorance. The chairman clearly has little appreciation of how incredibly hard arts organisations struggle to meet the twin objectives of artistic quality and financial solvency. What is more, if Arts Council England believes that dropping potential funding bombshells on organisations a week before Christmas, then allowing a mere 18 working days to lodge an appeal, is a professional approach, something is seriously wrong.

John Leech: I welcome this debate. "Bombshell" is the appropriate way to describe how some organisations found out about the potential loss of their funding. Is my hon. Friend aware that many organisations were given no indication that there was anything wrong with the way in which they dealt with their affairs? In fact, they were under the impression that they were fulfilling all the Arts Council England criteria, and did not for a second think that there was a possibility of losing their money.

Phil Willis: I am grateful to my hon. Friend for his intervention, and I will come to that point later. On the speed with which the cuts were carried out, I trust that the Minister will, if nothing else, carry out an urgent inquiry into the processes used by Arts Council England to distribute taxpayers' money.
	The furore that followed the December announcements resulted in a vote of no confidence in Arts Council England from distinguished writers and actors. Protests from Sir Salman Rushdie, Harold Pinter and Sir Ian McKellan to Joanna Lumley, among others, brought about some reprieves, but the net result is that a mere two weeks before the commencement of the new financial year, 185 organisations have had their grants totally removed and 27 face significant cuts that put their future in jeopardy.
	One such organisation is north Yorkshire's highly regarded Harrogate theatre. Its grant will be reduced by a staggering 64 per cent. from £409,000 to £150,000 from 1 April this year. That comes after a partially successful appeal against Arts Council Yorkshire's proposal of 12 December to cut £300,000 from the 2008 grant. The actions of Arts Council Yorkshire frankly do not bear the lightest scrutiny. Indeed, they add currency to the view of Nicholas Hytner, director of the National Theatre, that regional arts councils function as "unacceptable fiefdoms".
	On the point raised by my hon. Friend the Member for Manchester, Withington (Mr. Leech), on 7 August 2007 Harrogate theatre had its most recent annual review with Arts Council theatre officers. It was informed that a "positive" report would be forwarded to the Arts Council regarding the growing financial strength and proposed artistic direction of the theatre. Indeed discussions followed about an initiative called "the academy", a pioneering new artistic enterprise which brings together five regional theatres in a joint venture to nurture new talent by working with established professionals.
	There was no indication of disinvestment at that time, nor was there any hint of cuts at the joint funders meeting on 5 November, when Arts Council Yorkshire, together with Harrogate borough council, North Yorkshire county council and the theatre agreed that the theatre had successfully completed recovery and refurbishment as agreed two years earlier. Yet one month later, proposals to cut 75 per cent. of the grant were received, with a miscellany of concerns that were an insult to the board and management of the theatre.
	First, there was concern about programming, based almost exclusively on one problematic production, "Look Back in Anger" in 2005, co-produced by Pilot Theatre and the Oldham Coliseum. The wide range of critically acclaimed work produced over a 10-year period, including works from Terry Johnson to Arthur Miller, Yasmina Reza to Chekhov and Tennessee Williams to William Shakespeare, appears to have been totally ignored. On the basis of one production, Arts Council Yorkshire proposes that the theatre should become a receiving house only. To add insult to injury, both Pilot Theatre and the Oldham Coliseum, which collaborated on the production of "Look Back in Anger", received funding increases from the Arts Council for their innovative productions.
	Secondly, concern was expressed about the programming operation that included large amounts of amateur productions and a long-running pantomime. In fact, Harrogate theatre does not programme amateur work; rather, amateur companies hire the theatre for their productions, just as the Crucible in Sheffield is hired for the world snooker championships, or other theatres hire space for conferences or corporate events. That is how regional theatres survive. Eighty-five per cent. of Harrogate's theatre time is devoted to professional theatre, with hiring making up less than 15 per cent. As for the Christmas pantomime, like many theatres this comprises a huge windfall to support operating costs throughout the year. Perversely, whereas Harrogate's pantomime runs for six and a half weeks, that at the West Yorkshire Playhouse operates for nine and a half weeks and that at the York Theatre Royal seven and a half weeks, yet neither received a single word of criticism from Arts Council Yorkshire.
	The third concern was the physical limitations of the theatre, which has just undergone, with the agreement of the Arts Council, a complete refurbishment paid for entirely by the public and Harrogate borough council. The theatre, built in 1900, with its Victorian proscenium, does not restrict but challenges production teams to place contemporary work in it. It is the same challenge faced by theatres across the region and across Britain. It is what makes theatre so exciting and innovative in the United Kingdom. Audiences in Harrogate theatre now have new seating in the auditorium, disabled access and lifts; backstage there have been massive technical improvements; and new refreshment facilities are planned for this summer—all known of, planned and approved by Arts Council Yorkshire.
	Appallingly, none of these three main areas of concern was discussed with the theatre or the other funding organisations before December 2007. It is shameful that no details to support these criticisms have been made available for scrutiny. They appear to be convenient excuses to decimate the budget. I therefore ask the Minister in her reply to instruct Arts Council Yorkshire to publish these details and to do so immediately. The decision to disinvest will have a potentially catastrophic effect on Harrogate theatre and leave Arts Council England open to legal challenge. I urge the Minister to act soon.
	At the heart of the concerns of Harrogate theatre, its staff and supporters is a sense of disbelief and injustice at the inconsistency, speed and finality of Arts Council England's decisions. In May 2007, Arts Council Yorkshire announced that it wished to put more money into the visual arts, and in so doing challenged the status quo—quite rightly. It claimed that by simply continuing to fund existing programmes, there was a danger of stagnation—a sentiment applauded by Harrogate theatre's chief executive, David Brown, and the whole trust board. Indeed, in response to the direction of Arts Council Yorkshire and its own appraisal of past programmes, the theatre board went to the Arts Council with its own programme for disinvestment and change. It agreed that it could not match the other six large Yorkshire theatres in full-blown productions, and it accepted that Harrogate's future lay in a mixture of smaller productions and received productions, along with the vital work of taking important theatrical art out into the rural communities of north Yorkshire and supporting arts education in north Yorkshire.
	It appears that Arts Council Yorkshire used that highly professional dialogue as an opportunity to humiliate the theatre management, which is exactly what the advice letter of December 2007 appears to have done. Regional theatres should not be pigeonholed as either producing houses or receiving houses. A theatre needs to deliver a service that is relevant to its community, while engaging with innovative targets that provide a challenge for the art, artists, staff and audience.
	In the past 10 years, Harrogate theatre has engaged with its community to a point where the community has provided support with its presence and its cash. Last year, 60,000 people attended live events with 10,000 tickets sold to first-time attendees. Over the same period, the public helped to raise more than £500,000 to carry out refurbishment. The theatre's education department has worked with students all over the region, engaging with more than 20,000 youngsters in theatre-related activity, 700 of whom are members of Harrogate youth theatre. Harrogate theatre has been at the heart of Harrogate life for more than a century, and it has a terrific future if Arts Council Yorkshire can be persuaded to think again about those insensitive and ill-informed cuts.
	The theatre has proposed a 44 per cent. reduction in grant over the period of this comprehensive spending review with transitional support in the first year to assist with radical adjustment rather than an immediate 75 per cent. cut, which would bring havoc to the organisation. The scenario proposed by the theatre would allow a strong core operation of a specifically produced season aligned with a substantial education and outreach programme that would exist alongside alternative income streams, thus providing a valuable service to the people of Harrogate and north Yorkshire. It is a well thought out proposal that meets the Arts Council objectives, and it will keep the theatre alive in rural north Yorkshire. I plead with the Minister to use her office to seek a sensible and negotiated outcome.
	Finally, I will be at Harrogate theatre on Thursday to share in a memorial tribute to a magnificent lady and a dear friend, Joan Mallett, who was not only vice-president of the theatre but a woman who devoted 47 years to the theatre as an actor, producer, director and board member. Shortly before her sad death, Joan said this about her life:
	"I've been to a marvellous party!"
	I am sure that a resolution to this problem would see Joan raise a glass to the Minister in heaven!

Margaret Hodge: I congratulate the hon. Member for Harrogate and Knaresborough (Mr. Willis) on securing the debate and on the passion that he has shown in the defence of the theatre in his constituency. He has highlighted something that I regard as extremely important, namely the contribution that theatre can make at the heart of community and the contribution that culture can make in building an identity and a feeling of belonging in communities up and down the country.
	The hon. Gentleman has discussed the difficulties facing the Arts Council. I would not call them "difficulties"; I would reword that and call them "challenges". Those challenges are of the Arts Council's choosing, and they are challenges that the Arts Council has met and that we support. The Arts Council is looking more radically than it has ever done in the past at the organisations that it chooses to fund regularly. It is easy to forget that just 10 years ago many of our theatres were struggling to survive, because they were caught in a downward spiral of deficits and because funding was inadequate.
	The situation has been transformed by our achievements in the past decade. There has been a 73 per cent. real-terms increase in funding to the Arts Council, which has meant the doubling of funding for the theatre, and the theatre sector has responded in the best possible way by improving the quality of its work and growing its audiences. According to our last survey, nearly a quarter of adults attended a theatre performance in 2005-06.
	I managed to go to the theatre tonight before coming to this debate. I saw "Random", by Debbie Tucker Green—a terrific, powerful play at the Royal Court. I could not resist the temptation of seeing how excellently it had been directed by Sacha Wares. The solo part was powerfully performed by Nadine Marshall. The play touched on many issues that I know are close to the hon. Gentleman—it was about a black family who had lost a boy through a stabbing. The best line of the play was:
	"Don't trouble trouble 'til trouble trouble you."
	That will stay with me.
	I am proud of the Government's record of recognising and supporting the arts and of the great achievements that the arts sector has delivered with that investment. In October last year, we announced that grant in aid funding for Arts Council England would rise to £467 million by 2010-11, an increase of 3.3 per cent. above inflation. In our tight fiscal environment, that is good. It will represent an extra £50 million above inflation by 2010-11. On 1 February this year, the Arts Council announced its spending plans for the coming three years. Some 753—that is, three out of four—of its regularly funded organisations will receive increases in their funding in line with, or above, inflation and 81 new organisations will be invited to join the regularly funded portfolio.
	Let me spell out to the hon. Gentleman what that means for theatre. In 2007-08, annual investment will be £101 million. Proposed investment between 2008-09 until the end of the spending review period is £318 million, a cash-terms increase of 8 per cent. There are 223 organisations and 21 new organisations in the portfolio. Producing theatres remain central to the theatre infrastructure of this country and many organisations are receiving above-inflation uplifts, including the New Wolsey in Ipswich, the Oldham Coliseum, the Arcola in London, the New Vic in Stoke-on-Trent, the Northern Stage in Newcastle and the Hull Truck Theatre Company. Funding for organisations in the theatre sector in Yorkshire will rise from £7.2 million to £7.5 million, an increase of 4 per cent. in cash terms. Overall, Arts Council England will invest nearly £81 million in Yorkshire between 2008 and 2011.
	In that context of good news, there has been bad news for some organisations. There will be 43 non-renewals and reductions, including the Harrogate theatre. However, I say to the hon. Gentleman in all sincerity that politicians have to stay away from making decisions on what and what not to fund. Since the Arts Council was founded in 1946, it has been a fundamental principle that funding decisions for individual arts organisations should be made by the council, at arm's length from the Government. When the Leader of the Opposition had a meeting with the Arts Council, he said that he hoped it was not going to fund too many one-legged, Lithuanian lesbian organisations. I hope that he understands why it is so important that we maintain our distance; we do not want those sorts of values to inform funding decisions made by the Arts Council.
	The arts change and grow, and it is right that the council's funding plans should reflect that and make room for new talent to develop and succeed. We would not want it to fund the same organisations at the same level year after year. That is why I support the approach that has been taken, although it has led to some difficult situations.
	I turn directly to the issues raised by the hon. Gentleman. I urge him to seek a meeting with his regional arts council and with Harrogate theatre to understand better the funding decision. The reason why some of the underpinning rationale for the decision has not been made public is that it is seen as a confidential relationship between the organisation and the Arts Council. It would benefit him, and the theatre, if he had that open, face-to-face discussion with the Arts Council.
	I hope that the hon. Gentleman accepts the principle that the Arts Council should not fund things in the present and the future just because it has funded an organisation in the past. However, I understand that this year's process has been painful, and I know that the Arts Council will itself want to review it to see how it can do things better next time. Again, that is something for it, not for us to do, because that would be an unacceptable intervention.
	Taking the actual position on Harrogate theatre, in 2006-07 the Arts Council grant was nearly £400,000—27 per cent. of total income. In 2008-09, as the hon. Gentleman said, it will reduce to £150,000, which means that about 10 per cent. of its income will be met from Arts Council grant. As I understand it, the theatre therefore faces a cut in grant but not closure. In 2006-07, it earned £700,000 from box office receipts and from activities such as incoming tours and co-productions. It also gets a grant of just under £200,000 from the local authority. It is interesting enough to look at those figures, but there is another aspect. The figures given to me say that £40,000 came from donations and sponsorship and £40,000 from fundraising events.
	One of the bits of work that I am trying to do, right across the cultural and arts field, is to try to move these organisations from a total dependence on public subsidy to what I would term a much more social enterprise culture, so that they see themselves with a range of funding streams, not as completely dependent on public funding. That is hugely important, not only because it means that they are not dependent on the vagaries of public funding expenditure rounds but because it gives them an independence that allows them to be much more innovative and adventurous than if they are always looking over their shoulder at the public sector.
	The hon. Gentleman's region happens to be rather well supplied with producing houses, including West Yorkshire playhouse in Leeds, York Theatre Royal, Hull Truck Theatre Company, Stephen Joseph theatre in Scarborough and the Crucible theatre in Sheffield. A view will probably have to be taken on that regional infrastructure. There is also a range of Arts Council-funded receiving houses in Yorkshire. Lawrence Batley theatre in Huddersfield and Theatre Royal Wakefield are comparable in scale to Harrogate theatre. Lawrence Batley theatre will receive £120,000 from the Arts Council—not that different from Harrogate theatre—and Theatre Royal Wakefield will receive £96,000. As a receiving theatre, Harrogate does not do that badly.
	Many of the organisations that face challenges over their funding this year were surprised. I think that that is because the Arts Council has never undertaken this exercise in the past, and nobody really believed that they would undertake that radical reform to ensure that we fund those organisations that will contribute to future developments. I am told that the theatre was first informed on 12 December 2007. That was a little late, partly because we as a Department took the view that we would not take an early settlement under the comprehensive spending review but hold out for a much better settlement from the Chancellor. That worked in our favour so that we were able to inflation-proof and grow a little bit the totality of the funding to the Arts Council.
	The Arts Council told the theatre that it believed that over several years performance had been consistently weaker than other parts of the regional building- based producing theatre network. It says that that was set out in the letter of 2005, and it did not change its view. It recognised that the managerial and financial improvements delivered in the past year addressed some of the issues that it had raised previously, but the inherent weaknesses of the organisation in relation to the quality of the programme and the long-term challenge of the theatre's physical limitations informed the decision that it took. The council thought that the current programme and operation, with large amounts of amateur productions, a long-running Christmas show, and the toured-in work to which the hon. Gentleman referred, is more indicative of a middle-scale receiving theatre than a producing one. It felt that that made its current investment disproportionate.
	In the light of those remarks, the Arts Council wanted to enter into discussions with the theatre and other funding partners to explore options for presenting performing arts work in the town. It remained unconvinced that the theatre has the capacity to build and sustain high audience levels for a year-round programme of quality produced work and thus it believed that the scale of its previous investment did not represent value for money.
	As the hon. Gentleman will know, representations were made by the Harrogate theatre to the Yorkshire regional arts council, which then met to consider those representations at the end of January. At that meeting, the regional arts council could not accept the argument from Harrogate theatre for an alternative level of reduction, as the hon. Gentleman proposed. However, it acknowledged that Harrogate theatre was distinctive from other similar scale receiving theatres in its significance to a large rural area. That argument, advanced by the theatre and the local authority funding partners when they talked about the importance of maintaining significant rural outreach, youth and educational work, informed the regional arts council's decision to raise the level of support that it was willing to give. That is how we ended up with the £150,000 figure.
	I know that my response will not please the hon. Gentleman as much as he would have liked, but I urge him to deal with the issue. I hope that he understands the important reason why Ministers do not engage in challenging such decisions. Our task is to ensure that any information we have is put before the Arts Council, but the decision has to be for the council. I support the proposition that underpinned its strategy this year, which was to refresh its portfolio to fund innovative, new theatre organisations so that the cultural ecology of the UK could remain pre-eminent in the world today. Within that policy, there will always be challenges for individual theatres, and for the theatre sector as a whole, but we are in a better position to meet those challenges, and to make the most of the new opportunities on offer, than we ever have been before. I hope that, in that spirit, the hon. Gentleman will accept my response.
	 Question put and agreed to.
	 Adjourned accordingly at twenty-eight minutes to Eleven o'clock.